Exhibit
10.1


 


Execution Copy


 


STOCK PURCHASE
AGREEMENT (this “Agreement”), dated as of May 13, 2004, by and among PROTECTIVE UNDERWRITING SERVICES, INC., a
Delaware corporation (“Purchaser”),
ARCH CAPITAL HOLDINGS LTD., a
Bermuda company (“Seller”), and ARCH CAPITAL
GROUP LTD., a Bermuda company (“Arch Parent”).


 


WHEREAS,
on the date hereof, Seller is the owner of 3,318.72 shares of common stock (the
“AIIHC
Common Shares”) of
American Independent Insurance Holding Company, Inc., a Pennsylvania
corporation (“AIIHC”),
representing all of the issued and outstanding shares of common stock of AIIHC,
and Arch Reinsurance Company, a Nebraska corporation and an indirect, wholly
owned subsidiary of Arch Parent (“ARC”),
is the owner of 3,500 shares of Series A Preferred stock (the “AIIHC
Preferred Shares”) of AIIHC, representing all of the issued and
outstanding shares of preferred stock of AIIHC;


 


WHEREAS,
on the date hereof, AIIHC is the owner of all of the issued and outstanding
common stock of (i) American Independent Services Company, Inc., a Pennsylvania
corporation (“American Independent Services”), and (ii) American Independent Insurance Company, a
Pennsylvania corporation (“American Independent Insurance”);


 


WHEREAS, on
the date hereof, Arch Reinsurance Ltd., a Bermuda company and an indirect,
wholly owned subsidiary of Arch Parent (“ARL”), is the owner of all of the issued
and outstanding shares of capital stock of (i) The Personal Service Insurance
Co., an Ohio corporation (“PSIC”),
and (ii) Anson B. Smith & Co., an Ohio corporation (“Anson”);


 


WHEREAS, immediately
prior to the Closing (as hereinafter defined), (i) Arch Parent will cause ARL
to contribute all of the outstanding capital stock of PSIC and Anson and
$3,500,000 to Seller and, in turn, Seller will contribute all of such capital
stock of PSIC and Anson and $3,500,000 to AIIHC, on the terms and subject to
the conditions set forth in this Agreement (collectively, the “Contributions”); and (ii) Seller will cause AIIHC
to redeem the AIIHC Preferred Shares for a redemption price equal to $3,500,000
as provided in the applicable Statement with Respect to Shares as to
Designations, Powers, Preferences and Rights of the Series A Preferred Stock of
AIIHC (the “Redemption”);
and


 


WHEREAS, at
Closing, the parties desire that Seller will sell the AIIHC Common Shares,
representing all of the outstanding capital stock of AIIHC, to Purchaser for a
purchase price of $46,000,000, on the terms and subject to the conditions set
forth in this Agreement.


 


NOW, THEREFORE,
in consideration of the mutual covenants and agreements contained herein, the
parties, intending to be legally bound, hereby agree as follows:


 


ARTICLE I



PURCHASE AND SALE OF AIIHC COMMON SHARES


 


SECTION 1.01                    Sale of
AIIHC Common Shares.  On the terms
and subject to the conditions set forth in this Agreement, at the Closing,
Seller shall sell to Purchaser all of the


 

















 


AIIHC Common
Shares, and Purchaser shall purchase from Seller all of the AIIHC Common
Shares, for the Purchase Price (as hereinafter defined) specified in
Section 1.02.


 


SECTION 1.02                    Purchase
Price.  The purchase price for the
AIIHC Common Shares (the “Purchase Price”) shall consist of $46,000,000 in
cash to Seller.


 


SECTION 1.03                    Payment of
the Purchase Price.  At the Closing,
Purchaser shall pay the Purchase Price to Seller by wire transfer of
immediately available funds pursuant to written instructions provided by Seller
to Purchaser at least two (2) business days prior to the Closing Date.


 


SECTION 1.04                    Delivery of
the Shares.  Seller shall deliver to
Purchaser at the Closing certificates representing the AIIHC Common Shares,
each duly endorsed or accompanied by a duly executed stock power, in
appropriate form and sufficient to transfer the AIIHC Common Shares to
Purchaser (with, if applicable, all appropriate stock transfer tax stamps
affixed), free and clear of all liens, claims, options, encumbrances or
restrictions whatsoever (collectively, “Liens”), other than Liens arising
pursuant to applicable federal and state securities laws.


 


SECTION 1.05                    Closing.  On the terms and subject to the conditions
set forth in this Agreement, the closing of the purchase and sale of the AIIHC
Common Shares (the “Closing”) shall take place at the offices
of Arch Capital Services Inc., 20 Horseneck Lane, Greenwich, Connecticut  06830, on the date which is twelve (12)
business days after the date of the satisfaction or waiver of the last of the
conditions to Closing set forth in Article VIII and Article IX hereof,
or at such other location and on such other date as the parties may mutually
agree.  The date on which the Closing
shall occur is sometimes referred to herein as the “Closing Date.”


 


ARTICLE II



REPRESENTATIONS AND WARRANTIES OF ARCH PARENT AND
SELLER


 


Each of Arch Parent and Seller hereby jointly and severally represents
and warrants to Purchaser as follows:


 


SECTION 2.01                    Corporate
Organization; Subsidiaries.


 


(a)                                  Each
of Arch Parent and Seller is a corporation duly organized, validly existing and
in good standing under the laws of Bermuda. 
Copies of the organizational documents of each of Arch Parent and
Seller, with all amendments thereto to the date such documents are delivered
hereby, will be delivered to Purchaser or its representatives prior to the Due
Diligence End Date, and such copies will be accurate and complete as of the
date thereof.


 


(b)                                 AIIHC
and each Subsidiary (as defined below) is a corporation duly organized, validly
existing and in good standing under the laws of its state of
incorporation.  Copies of the
Certificate of Incorporation or Articles of Incorporation, as applicable, and
By-Laws of AIIHC and each Subsidiary, with all amendments thereto to the date
such documents are furnished hereby, will be furnished to Purchaser or its
representatives prior to the Due Diligence End Date, and such copies will be
accurate and complete as of the date thereof.


 


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SECTION 2.02                    Qualification
to Do Business.  AIIHC and each
Subsidiary has the requisite corporate power and authority and all necessary
governmental authority to own, operate or lease the properties that it purports
to own, operate or lease and to carry on its business as it is now being
conducted, and is duly qualified to do business as a foreign corporation, and
is in good standing, in each jurisdiction where the character of its properties
owned, operated or leased or the nature of its activities makes such
qualification necessary, except any such jurisdiction where the failure to be
so qualified and in good standing would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect (as defined in
Section 10.02(a) below).


 


SECTION 2.03                    Authorization
and Validity of Agreement.  Each of
Arch Parent and Seller has all requisite corporate power and authority to enter
into this Agreement, to carry out its obligations hereunder and to consummate
the transactions contemplated hereby. 
The execution and delivery of this Agreement and the performance of Arch
Parent’s and Seller’s obligations hereunder have been duly authorized and
approved by all necessary corporate action of Arch Parent and Seller, except
for the approval, if necessary, of the Boards of Directors of Seller and Arch
Parent as described in Section 7.01(g), and subject to the receipt of regulatory
approvals described on Schedule 2.06,
no other proceedings on the part or in respect of Arch Parent or Seller is
necessary to authorize such execution, delivery and performance or the
consummation of the transactions contemplated hereby.  Except for the need to obtain approval, if necessary, of the
Boards of Directors of Seller and Arch Parent as described above, this
Agreement has been duly executed by Arch Parent and Seller and constitutes a
valid and binding obligation of each of Arch Parent and Seller, enforceable
against each of them in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, moratorium or similar laws of general
application relating to or affecting creditors’ rights generally and except for
the limitations imposed by general principles of equity.  At the Closing, no further approval or
authority of the shareholders or of the Boards of Directors of Arch Parent or
Seller will be required for the consummation by Seller of the transactions
contemplated by this Agreement.


 


SECTION 2.04                    Capitalization.


 


(a)                                  The capitalization of AIIHC and the Subsidiaries is as follows:


 


(i)   The authorized capital
stock of AIIHC consists of 20,000,000 shares of common stock of AIIHC and
5,000,000 shares of preferred stock of AIIHC. 
The AIIHC Common Shares are outstanding, all of which are validly
issued, fully paid, nonassessable and free of any preemptive rights, and owned,
beneficially and of record, by Seller, free and clear of all Liens, except for
such Liens arising pursuant to applicable federal and state securities
laws.  The AIIHC Preferred Shares are
outstanding, all of which are validly issued, fully paid, nonassessable and
free of any preemptive rights, and owned, beneficially and of record, by ARC,
free and clear of all Liens, except for such Liens arising pursuant to
applicable federal and state securities laws. 
The AIIHC Common Shares and AIIHC Preferred Shares constitute, and as of
the Closing the AIIHC Common Shares will constitute, all of the issued and outstanding
capital stock or other equity interests or equity securities of AIIHC.


 


(ii)  The authorized capital
stock of PSIC consists of 20,000 shares of common stock of PSIC.  There are 20,000 shares of PSIC Common Stock
(the “PSIC Shares”)


 


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outstanding,
all of which are validly issued, fully paid, nonassessable and free of any
preemptive rights, and owned, beneficially and of record, by ARL, free and
clear of all Liens, except for such Liens arising pursuant to applicable
federal and state securities laws. 
After the Contributions, all of the PSIC Shares will be owned,
beneficially and of record, by AIIHC, free and clear of all Liens, except for
such Liens arising pursuant to applicable federal and state securities
laws.  The PSIC Shares constitute all of
the issued and outstanding capital stock or other equity interests or equity
securities of PSIC.


 


(iii)  The authorized capital
stock of Anson consists of 10,000 shares of common stock of Anson.  There are 4,344 shares (the “Anson Shares”) of Anson common stock
outstanding, all of which are validly issued, fully paid, nonassessable and
free of any preemptive rights, and owned, beneficially and of record, by ARL,
free and clear of all Liens, except for such Liens arising pursuant to
applicable federal and state securities laws. 
After the Contributions, all of the Anson Shares will be owned,
beneficially and of record, by AIIHC, free and clear of all Liens, except for
such Liens arising pursuant to applicable federal and state securities
laws.  The Anson Shares constitute all
of the issued and outstanding capital stock or other equity interests or equity
securities of Anson.


 


(iv)  The authorized capital
stock of American Independent Services consists of 1,000 shares of common
stock.  There are 100  shares of American Independent Services
common stock  (the “American Independent Services  Shares”)
outstanding, all of which are validly issued, fully paid, nonassessable and
free of any preemptive rights, and owned, beneficially and of record, by AIIHC,
free and clear of all Liens, except for such Liens arising pursuant to
applicable federal and state securities laws. 
The American Independent Services Shares constitute all of the issued
and outstanding shares of capital stock or other equity interests or equity
securities of American Independent Services.


 


(v)  The authorized capital
stock of American Independent Insurance consists of 20,000  shares of common stock.  There are 12,144 shares of American
Independent Insurance common stock outstanding 
(the “American Independent
Insurance  Shares”), all
of which are validly issued, fully paid, nonassessable and free of any
preemptive rights, and owned, beneficially and of record, by AIIHC, free and
clear of all Liens, except for such Liens arising pursuant to applicable
federal and state securities laws.  The
American Independent Insurance Shares constitute all of the issued and
outstanding shares of capital stock or other equity interests or equity
securities of American Independent Insurance.


 


(vi)  The authorized capital
stock of C&L Insurance Agency, Inc., a Pennsylvania corporation (“C&L”), consists of 1,000  shares of common stock. 
There are 100 shares of C&L common stock (the “C&L Shares”) outstanding, all of which
are validly issued, fully paid, nonassessable and free of any preemptive
rights, and owned, beneficially and of record, by American Independent
Services, free and clear of all Liens, except for such Liens arising pursuant
to applicable federal and state securities laws.  The C&L Shares constitute all of the issued and outstanding
shares of capital stock or other equity interests or equity securities of
C&L.


 


(vii)  PSIC, Anson, American
Independent Services, American Independent Insurance and C&L are sometimes
referred to herein collectively as the


 


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“Subsidiaries”, and each individually as a “Subsidiary”.  The
PSIC Shares, Anson Shares, American Independent Services Shares, American
Independent Insurance Shares and C&L Shares are sometimes referred to
herein collectively as the “Subsidiary Shares.”


 


(b)                                 Neither
AIIHC nor any Subsidiary has any outstanding subscriptions, warrants,
convertible securities, obligations, options or rights entitling any person to
acquire shares of capital stock or other equity interests or equity securities
of AIIHC or any such Subsidiary, or any outstanding securities, options,
warrants, rights or other instruments convertible into shares of capital stock
or other equity interests or equity securities of AIIHC or any such Subsidiary.


 


(c)                                  Except
as disclosed on Schedule 2.04(c)
hereto, and except for the equity interests in the Subsidiaries, neither AIIHC
nor any of the Subsidiaries, directly or indirectly, owns an equity interest in
any other entity, or has any contractual or other commitment to make any
investment in any entity, except for investments made in the ordinary course of
business and in accordance with the respective investment policies of AIIHC and
the Subsidiaries in effect on the date hereof.


 


SECTION 2.05                    Non-Contravention.  Except as disclosed on Schedule 2.05
hereto, the execution, delivery and performance of this Agreement and
consummation of the transactions contemplated hereby will not (i) result in a
breach of any of the terms of, or constitute a violation of or default under,
the organizational documents of Arch Parent or Seller, (ii) result in a breach
of any of the terms of, or constitute a violation of or default under, result
in any modification of, accelerate or permit the acceleration of the
performance required by, or otherwise give any other contracting party the
right to terminate any contract, indenture or other instrument or agreement by
which Arch Parent, Seller, AIIHC or any of the Subsidiaries, or any of their
respective assets are subject or bound, (iii) result in the creation of a Lien
on the AIIHC Common Shares, the AIIHC Preferred Shares or the Subsidiary
Shares, except for such Liens arising pursuant to applicable federal and state
securities laws, (iv) result in the creation of a Lien on any of the assets of
AIIHC or any of the Subsidiaries, (v) result in the breach of the terms and
conditions or cause an impairment of any license or government authorization of
AIIHC or any Subsidiary or (vi) violate any statute, law or regulation of any
jurisdiction or order, judgment, injunction, award or decree of any court or
government of competent jurisdiction by which Arch Parent, Seller, AIIHC or any
of the Subsidiaries are bound; except in the case of clause (ii) through (vi)
above for such breaches, violations, defaults or creation of Liens which would
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.


 


SECTION 2.06                    Consents.  Except for the filings with the insurance
departments in Delaware, Indiana, Maryland, Ohio and Pennsylvania and as
disclosed on Schedule 2.06 hereto, no
consent, waiver, authorization, approval, order, license, certificate or permit
of or from, or registration, declaration or filing with, or notice to any court
or other tribunal, governmental agency or any other person, nor under any
contract, indenture, mortgage, lease, license or other agreement or instrument
to which Arch Parent or Seller or any of their respective subsidiaries is a party
or by which Arch Parent or Seller or any of their respective subsidiaries, or
any of their respective assets, is subject or bound, is required by or with
respect to Arch Parent, Seller, AIIHC or any of the Subsidiaries in connection
with the execution, delivery or performance of this Agreement and the
consummation of the transactions contemplated hereby.


 


 


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SECTION 2.07                    Financial
Statements.


 


(a)                                  Seller
will deliver to Purchaser prior to the Due Diligence End Date (i) the financial
statements of (A) AIIHC and its Subsidiaries on the date hereof (consisting of
American Independent Insurance, American Independent Services and C&L) on a
consolidated basis, (B) American Independent Insurance and (C) PSIC and Anson,
on a combined basis and (D) PSIC, and, in the case of American Independent
Insurance and PSIC, related schedules and notes for the fiscal years ended
December 31, 2003 (the “2003 Annual Financial Statements”) and December 31, 2002 (the “2002 Annual Financial Statements”) (except
financial statements for the year ended December 31, 2002 for Anson, which
are not available) (the 2002 Annual Financial Statements together with the 2003
Annual Financial Statements are referred to as the “Annual Financial Statements”), and (ii) the financial statements
of (A) AIIHC and such Subsidiaries on a consolidated basis, (B) PSIC and Anson,
on a combined basis, (C) American Independent Insurance and (D) PSIC and, in
the case of American Independent Insurance and PSIC, related schedules and
notes for the period ended March 31, 2004 (collectively, the “Quarterly
Financial
Statements”).  The Annual
Financial Statements and the Quarterly Financial Statements are hereinafter
referred to collectively as the “Financial Statements.”


 


(b)                                 Each
of the Financial Statements presents fairly in all material respects the
financial position of (i) AIIHC and such Subsidiaries, (ii) PSIC and Anson,
(iii) American Independent Insurance and (iv) PSIC, as applicable, as of its
respective date and the results of the operations of AIIHC and such
Subsidiaries, on a consolidated basis, PSIC and Anson, on a combined basis,
American Independent Insurance and PSIC, as applicable, as of the respective
dates and for the periods indicated therein. 
The Financial Statements for (i) AIIHC and such Subsidiaries, on a
consolidated basis, and (ii) PSIC and Anson, on a combined basis, have been
prepared in accordance with generally accepting accounting principles as in
effect in the United States (“GAAP”),
consistently applied (and with respect to the Quarterly Financial Statements,
subject to the lack of year-end adjustments which are not material in the
aggregate and, with respect to all Financial Statements, the absence of
footnotes thereto).  The Financial
Statements for PSIC and American Independent Insurance, as applicable, have
been prepared in accordance with statutory accounting practices as prescribed
or permitted by the National Association of Insurance Commissioners (“SAP”), consistently applied throughout
the periods involved.  The Financial
Statements of PSIC and American Independent Insurance have been prepared in
conformity with accounting principles and practices prescribed or permitted by
the Insurance Department of the State of Ohio or the Insurance Department of
the Commonwealth of Pennsylvania, as applicable, consistently applied
throughout all periods.  Except as
disclosed in Schedule 2.07,
no material deficiency has been asserted with respect to the Financial
Statements of PSIC or American Independent Insurance by the applicable
insurance regulatory body.  The
statutory balance sheets and income statements included in the 2002 Annual
Financial Statements prepared in accordance with SAP have been audited by
PricewaterhouseCoopers LLP, and the Seller will make available to the Purchaser
true and complete copies of all audit opinions related thereto prior to the Due
Diligence End Date.


 


(c)                                  Except
for regular periodic assessments in the ordinary course of business or
assessments based on developments which are publicly known within the insurance
industry, to the knowledge of Seller, AIIHC or the Subsidiaries, no claim or
assessment is pending or threatened against PSIC or American Independent
Insurance by any state insurance guaranty


 


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association in connection with such association’s fund relating to
insolvent insurers which if determined adversely, would, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect.


 


SECTION 2.08                    Contracts
and Contract Parties.  Schedule 2.08 sets forth a list
of:  (a) all employment, severance,
change-in-control, agency (other than insurance agency), consultation, or
representation contract or contracts of any type (including, without
limitation, loans or advances) with any present member of senior management,
officer, director, trustee, agent (other than an insurance agent), consultant
or other similar representative of AIIHC or any of the Subsidiaries; (b) all
contracts with any person or entity containing any provision or covenant (i)
limiting the ability of AIIHC or any of the Subsidiaries to (x) sell any
products or services, (y) engage in any line of business or (z) compete with or
obtain products or services from any person or entity or (ii) limiting the
ability of any person or entity to compete with or to provide products or
services to AIIHC or any of the Subsidiaries; (c)  all licenses or other contracts included in the Intellectual Property
(as hereinafter defined); (d) each lease, sublease or capital lease of real
property, equipment or automobiles to which AIIHC or any of the Subsidiaries is
a party or by which AIIHC or any of the Subsidiaries is bound; (e) each
contract or arrangement relating to indebtedness or otherwise related to the
borrowing of money by or extension of credit to AIIHC or any of the
Subsidiaries or the imposition of any Liens on any of the assets of AIIHC or
any of the Subsidiaries, to which AIIHC or any of the Subsidiaries is a party,
or relating to the direct or indirect guarantee by AIIHC or any of the
Subsidiaries of any liability; (f) all contracts (other than Contracts (as
hereinafter defined) of insurance entered into in the ordinary course of
business) pursuant to which AIIHC or any of the Subsidiaries has agreed to
indemnify or hold harmless any person or entity (other than indemnifications or
hold harmless covenants in the ordinary course of business consistent with past
practice); (g) all contracts or arrangements (including, without limitation,
those relating to allocations of expenses, personnel, services or facilities)
between Seller or any of its Affiliates, on the one hand, and AIIHC or any of
the Subsidiaries, on the other hand; (h) all service contracts relating to
insurance-related activities of AIIHC or any of the Subsidiaries; (i) the specimen form insurance agent contract of any
Subsidiary and any insurance agent contract having terms different in any
material respect than the terms contained in such specimen form agent contract;
(j) each other contract to which AIIHC or any of the Subsidiaries is a
party under which AIIHC or any of the Subsidiaries’ aggregate revenues or
aggregate expenses exceeded $250,000 for the period from January 1, 2003
through December 31, 2003; (k) all contracts relating to future
disposition (including, but not limited to, restrictions on transfer or rights
of first refusal) or acquisition of any interest in any business enterprise,
and all contracts relating to future disposition of a material portion of the assets
of AIIHC or any Subsidiary other than, in each case, any assets to be acquired
or disposed of in the ordinary course of business; (l) all outstanding proxies
(other than routine proxies in connection with annual meetings), powers of
attorney or similar delegations of authority of AIIHC or any Subsidiary, other
than in the ordinary course of business and (m) any commitments or obligations
to enter into any of the foregoing (such contracts and arrangements being
hereinafter referred to collectively as the “Contracts”). 
Except for the Third Party Agreement (as defined in Section 2.29
hereof), true and complete copies of the Contracts which are in writing, and
written summaries of oral Contracts, shall be made available to Purchaser prior
to the Due Diligence End Date (as hereinafter defined).  Except as set forth in Schedule 2.08,
all Contracts are in full force and effect and constitute the legal, valid and
binding obligations of AIIHC or any of the Subsidiaries,


 


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which is a
party thereto, enforceable in accordance with their respective terms, except to
the extent that such enforceability may be limited by bankruptcy, receivership,
moratorium, conservatorship, reorganization or other laws of general application
affecting the rights of creditors generally or by general principles of
equity.  Neither AIIHC, nor any of the
Subsidiaries has received from any other party to such Contract any written
notice of termination or intention to terminate or not to honor the terms of
such Contract, or to the knowledge of the Seller, AIIHC or the Subsidiaries,
any oral notice of termination or intention to terminate or not to honor the
terms of such Contract.  Neither AIIHC
nor any of the Subsidiaries, nor, to the knowledge of Seller, AIIHC or the
Subsidiaries, any other party to any Contract, is in violation or breach of or
default in any material respect under any such Contract.


 


SECTION 2.09                    Employee
Benefit Plans.


 


(a)                                  Schedule 2.09(a) sets forth a complete
and correct list of each collective bargaining agreement and each employment,
severance or termination pay, hospitalization or other medical, life or other
insurance, supplemental unemployment benefits, profit-sharing, pension, or
retirement, bonus or other incentive compensation, deferred
compensation, salary continuation, disability, stock award, stock option, stock
purchase or other employee benefit policy, plan, program, agreement or arrangement, including without limitation
all “employee benefit plans” as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”), maintained by AIIHC or any of the
Subsidiaries or maintained by any other person or entity which is deemed a
single employer with AIIHC or any of the Subsidiaries pursuant to
Section 4001(b) of ERISA for the benefit of current or former employees of
AIIHC or any of the Subsidiaries (collectively referred to as the “Company Plans”).


 


(b)                                 The
Company Plans have been maintained, in all material respects, in accordance
with their terms and with all provisions of ERISA and the Internal Revenue Code
of 1986, as amended (including rules and regulations thereunder) (the “Code”), and other applicable laws and
regulations.


 


(c)                                  True,
correct and complete copies of the following documents, with respect to each of
the Company Plans, shall be delivered or made available to Purchaser by Seller
prior to the Due Diligence End Date, if applicable: (i) all plans and
related trust documents, and amendments thereto; (ii) the two most recent Forms
5500, actuarial reports and financial statements; (iii) the most recent
Internal Revenue Service (“IRS”)
determination letter; (iv) summary plan descriptions; and (v) material written
communications of general application to employees or other participants
relating to the Company Plans.


 


(d)                                 No
Company Plan is subject to Title IV of ERISA or Section 412 of the
Code.  AIIHC and each Subsidiary do not
have and have not had any obligation or liability, contingent or otherwise,
under Title IV of ERISA or Section 412 of the Code.  No Company Plan is a “multiemployer plan,”
as defined in Section 3(37) or 4001(a)(3) of ERISA (a “Multiemployer Plan”), and neither AIIHC nor
any Subsidiaries have incurred any liability resulting from a complete or
partial withdrawal from any Multiemployer Plan, nor has any of them incurred
any liability due to the termination or reorganization of a Multiemployer Plan
which has not been satisfied in full.


 


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(e)                                  Each
Company Plan intended to qualify under Section 401(a) of the Code has
received a favorable determination letter from the IRS regarding such
qualification and, to the knowledge of Seller, AIIHC and the Subsidiaries,
nothing has occurred with respect to the operation of any such Company Plan
that would cause the revocation of such determination letter.


 


(f)                                    Except as disclosed in Schedule 2.09(g) hereto, no Company
Plan provides benefits, including without limitation death or medical benefits
(whether or not insured) beyond retirement or other termination of service, except
as may be required by Section 4980B of the Code or at the sole expense of
the participant or the participant’s beneficiary.  With respect to each of
the Company Plans, the provisions of Section 4980B(f) of the Code,
Sections 601-609 of ERISA and the provisions of any other similar local law
have been complied with in all material respects.


 


(g)                                 Except as disclosed in Schedule 2.09(g) hereto, the
consummation of the transactions
contemplated by this Agreement will not (i) entitle any current or former
employee, officer or director of AIIHC or the Subsidiaries to severance pay,
unemployment compensation or any other payment, (ii) accelerate the time of
payment or vesting, or increase the amount of compensation or benefits due any
such employee, officer or director, or (iii) cause any change in benefits
provided under any Company Plan.


 


(h)                                 With respect to each Company Plan that is
funded wholly or partially through an insurance policy, neither AIIHC nor the
Subsidiaries have any liability under any such insurance policy in the nature
of a retroactive rate adjustment, loss sharing arrangement or other actual or
contingent liability arising wholly or partially out of events occurring prior
to the Closing.


 


(i)                                     There are no pending or, to the
knowledge of the Seller, AIIHC or the Subsidiaries, threatened claims by or on behalf of any of the Company Plans, by any
participant or beneficiary covered under any such Company Plan or otherwise
involving any such Company Plan (other than routine claims for benefits).


 


(j)                                     No
representations or communications,
oral or written, with respect to the participation, eligibility for benefits,
vesting, benefit accrual or coverage under any Company Plan have been made to
employees, officers, directors or agents (or any of their representatives or
beneficiaries) of AIIHC or the Subsidiaries which are not in accordance with
the terms and conditions of the Company Plans.


 


(k)                                  No
leased employee (within the meaning of Section 414(n) of the Code)
performs (or during the preceding three (3) years performed) services for AIIHC
or any Subsidiary.  AIIHC and the
Subsidiaries have at all times been in compliance in all material respects with
applicable laws regarding the classification of employees and independent
contractors.


 


SECTION 2.10                    Taxes.  Except as set forth in Schedule 2.10:


 


(a)                                  All
Tax Returns (as hereinafter defined) required to be filed on or before the
Closing Date by or with respect to AIIHC and each Subsidiary, including any
consolidated,


 


9

















 


unitary, affiliated or combined Tax Return of which AIIHC or any Subsidiary
is or was a member, have been or will be timely filed (taking into account
permitted extensions) with the appropriate taxing authorities, and such Tax
Returns are or will be true, correct and complete in all material respects.


 


(b)                                 All
Taxes (hereinafter defined), whether or not reflected in Tax Returns as filed,
due and payable by AIIHC or any Subsidiary on or prior to the Closing Date have
been timely and fully paid.  All Taxes
that AIIHC or any Subsidiary is or was required by applicable law to withhold
or collect have been duly withheld or collected and, to the extent required,
have been paid to the proper governmental authority, or other person.  There is no waiver or tolling of any statute
of limitations in effect with respect to the payment of any Taxes, or the
filing of any Tax Returns.  Neither
AIIHC nor any Subsidiary has agreed to, nor has there been agreed to on behalf
of AIIHC or any Subsidiary, any extension of time within which to file any Tax
Return which has not since been filed.


 


(c)                                  There
are no Liens for Taxes upon any assets of AIIHC or any Subsidiary, except liens
for Taxes not yet due and payable.


 


(d)                                 None
of AIIHC or any of the Subsidiaries is or ever has been a member of an
“affiliated group” within the meaning of Section 1504 of the Code or of
any group that has filed a combined, consolidated or unitary Tax Return.  Neither AIIHC nor any Subsidiary has any
liability for Taxes of any person (i) under Treasury Regulation
section 1.1502-6 (or any similar provision under state, local or foreign
law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise.


 


(e)                                  None
of AIIHC or any of the Subsidiaries is a party to or bound by any affiliated
group consolidated return tax allocation agreement, tax sharing agreement, tax
indemnification agreement or any similar arrangement or agreement.


 


(f)                                    Prior
to the respective acquisitions of AIIHC and the Subsidiaries by Arch Parent (or
its Affiliates), to the knowledge of Arch Parent, Seller, AIIHC or the
Subsidiaries, no written claim has been made by an authority in a jurisdiction
where AIIHC or any Subsidiary does not file Tax Returns that it is or may be
subject to taxation by, or is required to file a Tax Return in, that jurisdiction;
subsequent to such respective acquisitions, no written claim has been made by
an authority in a jurisdiction where AIIHC or any Subsidiary does not file Tax
Returns that it is or may be subject to taxation by, or is required to file a
Tax Return in, that jurisdiction.


 


(g)                                 AIIHC
and each Subsidiary have made adequate provisions on their financial statements
for the payment of all Taxes not yet due and payable.


 


(h)                                 No
deficiencies for Taxes of AIIHC or any of the Subsidiaries have been claimed,
proposed or assessed in writing by any taxing or governmental authority.  There are no pending or, to the knowledge of
Seller, AIIHC or the Subsidiaries, threatened audits, examinations,
investigations or proceedings in respect of Taxes or Tax Returns of AIIHC or
any of the Subsidiaries.  Seller will
deliver or make available to Purchaser correct and complete copies of all U.S.
federal income Tax Returns and examination reports to the extent they pertain
to AIIHC and the Subsidiaries for open Tax years or periods prior to the Due
Diligence End


 


10

















 


Date.  Schedule 2.10(h) lists all state and
foreign Tax Returns filed with respect to AIIHC and any of the Subsidiaries for
taxable periods ended after December 31, 2001.


 


(i)                                     None
of AIIHC or any Subsidiary is required to include in income any adjustment
pursuant to Section 481(a) of the Code 
(or any comparable provision of state, local or foreign law) by reason
of a voluntary change in method of accounting, and no taxing authority has
proposed in writing any such adjustment or change in method of accounting.


 


(j)                                     Neither
AIIHC nor any Subsidiary is a party to any agreement, contract or arrangement
that would result in the payment of any “excess parachute payments” within the
meaning of Section 280G of the Code (or any comparable provision of state,
local or foreign law).


 


(k)                                  Each
of AIIHC and any Subsidiary taxed pursuant to Sections 831 through 848 of the
Code has complied, in all material respects, with the rules and regulations
promulgated thereunder in computing its Taxes and preparing its Tax Returns,
including, for the years applicable, Treasury Regulation Section 1.832-4,
and to the extent compliance with such authority required AIIHC or any
Subsidiary to change its method of determining premiums earned, such company
followed the automatic change in accounting provisions of Revenue Procedure
99-49 in the first taxable year beginning after December 31, 1999.


 


(l)                                     Neither
AIIHC nor any of the Subsidiaries is a “United States real property holding
corporation” (a “USRPHC”) within
the meaning of Section 897 of the Code nor has been a USRPHC at any time
during the 5-year period ending on the Closing Date.


 


(m)                               As
used in this Agreement, “Taxes”
(or “Tax” as the context may
require) means all taxes, charges, fees, levies, or other like assessments,
including, without limitation, income, gross receipts, surplus lines, ad
valorem, value added, premium, excise, real property, personal property,
windfall profit, sales, use, transfer, license, withholding, employment,
payroll, unemployment insurance, social security, and franchise taxes imposed
by any governmental authority; and shall include any interest, fines,
penalties, assessments or additions to tax thereon.


 


(n)                                 As
used in this Agreement, “Tax Returns”
means any return, declaration, report, claim for refund, or information return
or statement relating to Taxes, including any schedule or attachment
thereto, and including any amendment thereof.


 


SECTION 2.11                    Litigation;
Third Party Claims.  Except as
disclosed in Schedule 2.11(a),
there is no litigation, investigation, proceeding or other claim pending or, to
the knowledge of Seller, AIIHC or the Subsidiaries, threatened involving AIIHC
or any of its assets or any Subsidiary or any of its assets other than ordinary
course coverage disputes under the insurance policies of American Independent
Insurance and PSIC.  Except as disclosed
in Schedule 2.11(b), none of AIIHC or
any of the Subsidiaries is subject to any outstanding orders, writs,
injunctions or decrees of any court, governmental agency or arbitration
tribunal.  There is no litigation,
investigation or proceeding pending or, to the knowledge of Arch Parent,
Seller, AIIHC or the Subsidiaries, threatened involving Arch Parent, Seller,
AIIHC or any Subsidiary that would reasonably be expected to prevent the
consummation of the transactions contemplated by this Agreement.


 


11

















 


SECTION 2.12                    Conduct of
Business and Absence of Changes. 
Except as disclosed in Schedule 2.12,
since December 31, 2003, AIIHC and each Subsidiary has conducted the
business in which it is engaged (collectively, the “Business”)
only in the regular and ordinary course and has not (a) undergone, and no event
or events have occurred which, individually or in the aggregate, are reasonably
likely to result in, a Material Adverse Change (as hereinafter defined) in its
condition (financial or otherwise), assets, liabilities, business or
operations, (b) incurred any indebtedness for borrowed money other than trade
payables in the ordinary course of business or issued or sold any debt
securities, (c) instituted any increase in the compensation or bonuses payable
or to become payable to any of its officers or employees, other than regularly
scheduled increases in compensation in the ordinary course of business, or any
changes in its personnel policies or employee benefits, (d) changed any method
of accounting or accounting practice or policy (including any reserving method,
practice or policy) or (e) paid any dividends, returns of capital or made any
other distributions to Seller or ARC.


 


SECTION 2.13                    Compliance
with Laws.


 


(a)                                  AIIHC
and the Subsidiaries have complied with all statutes, laws, ordinances, rules,
regulations, judgments, orders, decrees, pronouncements, bulletins, market
conduct recommendations, writs, injunctions, directives, judgments, settlement
agreements, principles of common law, constitutions and treaties enacted,
promulgated, issued, enforced or entered by any court, tribunal or governmental
agency applicable to AIIHC or any of the Subsidiaries or any of their
respective assets or the Business (collectively, the “Applicable Laws”), and all governmental licenses (including, without
limitation, licenses to transact the businesses of insurance, reinsurance,
third party administration, and insurance agency), permits, authorizations,
approvals and non-disapprovals, registrations, authorizations, qualifications
and filings with and under all federal, state, local or foreign laws and
governmental agencies necessary for the conduct of the Business (collectively,
the “Permits”)
have been duly and lawfully obtained and are in full force and effect, except
where the failure to comply with the Applicable Laws or obtain the Permits
would not, individually or in the aggregate, have a Material Adverse
Effect.  All the Permits are set forth
on Schedule 2.13.  The Business has been and is being conducted
in compliance, in all material respects, with all Permits.  There is no proceeding or investigation
pending or, to the knowledge of the Seller, AIIHC or the Subsidiaries,
threatened which would reasonably be expected to lead to the revocation,
amendment, failure to renew, limitation, modification, suspension or
restriction of any Permit.  None of
AIIHC or any Subsidiary is operating under any agreement or understanding with
any governmental agency which in any way restricts its authority to conduct its
business or requires any of AIIHC or any Subsidiary to take, or refrain from
taking, any action relating to the conduct of its business otherwise permitted
by the Applicable Laws.  There is no
pending or, to the knowledge of the Seller, AIIHC or the Subsidiaries,
threatened charge by any governmental agency that any Subsidiary has violated,
nor any pending or, to the knowledge of the Seller, AIIHC or the Subsidiaries,
threatened investigation by any governmental agency with respect to possible
violations of, any Applicable Laws where such violations are, individually or
in the aggregate, reasonably likely to have a material adverse effect on any
Subsidiary.  Each Subsidiary has filed
and will file all notices and reports required to be filed with any
governmental agency, except for such notices and reports as to which the
failure to file would not be reasonably likely to have a material adverse
effect on such company in the jurisdiction in which such notice or report was
required to be filed.


 


12

















 


(b)                                 Each
Subsidiary and, to the knowledge of the Seller, AIIHC or the Subsidiaries, its
agents have marketed, sold and issued insurance products in compliance, in all
material respects, with Applicable Laws applicable to the business of such
Subsidiary, respectively, and in the respective jurisdictions in which such
products have been sold, including, without limitation, in compliance in all
material respects with all applicable prohibitions against “redlining” or
withdrawal of business lines and all applicable requirements relating to
disclosures to customers and insureds.


 


(c)                                  Except
as set forth in Schedule 2.13(c),
all deficiencies or violations in all reports (including, but not limited to,
draft reports) of examinations of the affairs of each of PSIC and American
Independent Insurance with respect to its business (including, but not limited
to, market conduct examinations) issued by any governmental agency have been
resolved in all material respects.


 


(d)                                 Except
as disclosed in Schedule 2.13(d),
neither PSIC nor American Independent Insurance is a party to any contract with
or other undertaking to, or subject to any order by, or the recipient of any
supervisory letter or other written communication of any kind from, any
governmental agency which relates to its reserve adequacy or its claims,
marketing, sales, trade, or underwriting practices or policies in respect of
its business, nor has either been notified by any governmental agency that it is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, contract, undertaking, letter or other
written communication.


 


(e)                                  No
Subsidiary conducts any insurance business in any jurisdiction other than the
jurisdiction or jurisdictions in which it is licensed to engage in such
activity.


 


SECTION 2.14                    Absence of
Undisclosed Liabilities.  Except (a)
as disclosed on Schedule 2.14,
(b) as and to the extent disclosed on any balance sheet dated as of December 31,
2003 included in the Financial Statements, or (c) as incurred in the ordinary
course of the conduct of the Business since the date of any such balance sheet,
there exist no material liabilities or material obligations (whether absolute,
contingent or otherwise) in respect of the Business or the assets of AIIHC or
any Subsidiary.


 


SECTION 2.15                    Title to
Assets.  Each of AIIHC and the
Subsidiaries has valid and legal title to all of the assets and properties
which such party purports to own (including, without limitation, those
reflected in the 2003 Annual Financial Statements, but excluding any such
assets and properties sold, consumed, or otherwise disposed of since the date
of the 2003 Annual Financial Statements) free and clear of all Liens, except
(a) as set forth on Schedule 2.15,
(b) liens for taxes not yet due and payable or which are being contested
in good faith by appropriate proceedings and (c) minor imperfections of
title, none of which, individually or in the aggregate, materially detracts
from the value of the affected properties, or materially impairs the use of the
affected properties in the manner such properties currently are being used or
materially impairs the operations of such party.  Except as set forth on Schedule 2.15,
AIIHC and the Subsidiaries have good and valid title or legal right to all
material properties and assets, and a valid leasehold interest in all leased
property, necessary or used in the operation of the Business, including those
reflected in the 2003 Annual Financial Statements (other than any such assets
and properties sold, consumed, or otherwise disposed of since the date of the
2003 Annual


 


13

















 


Financial
Statements), and such properties, assets and leasehold interests are adequate
for the purposes for which they are presently used in the conduct of such
business.


 


SECTION 2.16                    Transactions
with Related Parties.  Except as
disclosed on Schedule 2.16 hereto:


 


(a)                                  Since
(1) February 28, 2001, with respect to AIIHC and its Subsidiaries on the
date hereof, and (2) November 30, 2002, with respect to PSIC and Anson,
none of Seller or other Affiliate of Seller, has or has had:


 


(i)  borrowed money from or
loaned money to AIIHC or any of the Subsidiaries for the benefit of their
respective businesses;


 


(ii)  any contractual or other
claims, express or implied, or of any kind whatsoever against AIIHC or any of
the Subsidiaries;


 


(iii)  any interest in any
property or assets used by AIIHC or any of the Subsidiaries; or


 


(iv)  engaged in any other
transaction with AIIHC or any of the Subsidiaries.


 


Each of the foregoing transactions has been timely reported to and
approved by any applicable state insurance departments as, and to the extent,
required by applicable law, except for any deficiencies as would not have a
Material Adverse Effect.


 


(b)                                 There
are no amounts due or otherwise owed by AIIHC or any of the Subsidiaries to
Seller or any Affiliate of Seller (other than AIIHC and the Subsidiaries).


 


(c)                                  There
are no amounts due or otherwise owed by Seller or any Affiliate of Seller
(other than AIIHC or any of the Subsidiaries) to AIIHC or any of the
Subsidiaries.


 


(d)                                 American
Independent Services has done no business with any insurance company other than
American Independent Insurance or PSIC or any agency other than C&L or
Anson.


 


SECTION 2.17                    Intellectual
Property.


 


(a)                                  Except
as disclosed on Schedule 2.17 hereto, AIIHC
and the Subsidiaries own or have a right to use (which right to use shall
continue in the same manner after the Closing Date as prior to the Closing
Date) each trademark, trade name, patent, service mark, brand mark, brand name,
domain name, right of publicity or privacy, database, copyright and other
intellectual property owned or used in connection with the operation of the
Business, including any application or registrations thereof, and each license
or other contract relating thereto (collectively, the “Intellectual  Property”),
free and clear of any and all Liens.  Schedule 2.17
sets forth a complete list of (i) all applied-for and registered Intellectual
Property owned by AIIHC and the Subsidiaries (including for each such
application or registration the record owner, the jurisdiction and the
registration and application numbers) and (ii) all other material


 


14

















 


Intellectual Property and with regard to the
foregoing (ii) further indicates whether such Intellectual Property is owned by
or licensed to AIIHC or any Subsidiary, and with regard to the foregoing (i) and
(ii) indicates whether such Intellectual Property is shared with Seller, any
Affiliate of Seller, or any third party. 
The use of the Intellectual Property by AIIHC and the Subsidiaries does
not conflict with, infringe upon, violate or interfere with or constitute a
misappropriation of any right, title, interest or goodwill, including, without
limitation, any intellectual property right, trademark, trade name, patent,
service mark, brand mark, brand name, database or copyright of any other
person, and, to the knowledge of the Seller, AIIHC and the Subsidiaries, no
person is challenging, infringing on or otherwise violating the right of AIIHC
or any Subsidiary with respect to any of its respective Intellectual Property.  Except
as disclosed on Schedule 2.17 hereto, AIIHC and the Subsidiaries own or
have valid and enforceable licenses or other rights to use, free and clear of
any and all Liens, all software used in connection with the operation of the
Business, the use of such software by AIIHC and the Subsidiaries does not
infringe on or otherwise violate the rights of any person, and, to the
knowledge of Seller, AIIHC and the Subsidiaries, no person is challenging,
infringing on or otherwise violating the right of AIIHC or any Subsidiary with
respect to any such software used by AIIHC and the Subsidiaries.


 


(b)                                 Except
as disclosed on Schedule 2.17
hereto, there are no actions that must be taken by the Seller, AIIHC or any
Subsidiary within 90 days from the date hereof, including the payment of any
registration, maintenance, or renewal fees or the filing with the United States
Patent and Trademark Office or such other appropriate U.S. or foreign office or
similar administrative agency, documents, applications or certificates for the
purposes of obtaining, maintaining, perfecting, preserving, or renewing any
rights in the registered or applied-for Intellectual Property.


 


(c)                                  No
Intellectual Property is subject to any outstanding decree, order, judgment,
settlement agreement, or stipulation that restricts in any manner the use,
transfer or licensing thereof by the Seller, AIIHC or any Subsidiary.


 


(d)                                 The
Intellectual Property is sufficient for the continued conduct of the Business
after the Closing Date in the same manner as such Business was conducted prior
to the Closing Date.


 


(e)                                  Seller
(with respect to the Business), AIIHC and each Subsidiary has at all times (i)
disclosed its personal data collection and use policy on its websites (as
applicable), and (ii) complied, in all material respects, with such policy.  Neither this Agreement nor the consummation
of the transactions contemplated hereby will violate any such personal data
policy or any other applicable privacy or personal data laws.


 


SECTION 2.18                    Insurance.


 


(a)                                  The
most recently completed reports of examination of PSIC and American Independent
Insurance conducted by any governmental agency or authority was for the periods
set forth in Schedule 2.18, and each of PSIC and American Independent
Insurance will furnish Purchaser with a complete and correct copy of such
reports prior to the Due Diligence End Date. 
Except as set forth on Schedule 2.18, since the date of such examinations, neither PSIC, nor American
Independent Insurance has been the subject of further examination


 


15

















 


by any insurance governmental agency or authority, and neither PSIC,
nor American Independent Insurance is currently undergoing examination by any
insurance governmental agency or authority, and Seller shall notify Purchaser
in writing of any such examination that shall have commenced after the date
hereof.


 


(b)                                 All
outstanding insurance coverage issued by each of PSIC and American Independent
Insurance is, in all material respects, to the extent required by applicable
law, on forms and at rates approved by the insurance regulatory authority of
the jurisdiction where issued or has been filed with and not objected to by
such authority within the period provided for objection.


 


(c)                                  Each
of PSIC and American Independent Insurance will provide to the Purchaser all
forms of Insurance Contracts (as hereinafter defined) used by it as of
June 30, 2003 prior to the Due Diligence End Date.  Since June 30, 2003, no forms of
Insurance Contracts written by either PSIC or American Independent Insurance
have been amended and no sales of any new forms of Insurance Contracts have
been commenced, other than changes to forms, which changes are not, in the
aggregate, material.  “Insurance Contract” shall mean any Contract
of insurance including all applications, supplements, binders, endorsements,
riders and ancillary agreements in connection therewith and including, without
limitation, reinsurance contracts issued by PSIC or American Independent
Insurance.


 


(d)                                 To
the knowledge of Seller, AIIHC and the Subsidiaries, (i) each insurance agent
or broker, at the time such agent or broker wrote, sold or produced business
for either PSIC or American Independent Insurance, was duly licensed as an
insurance agent or broker for the type of business written, sold or produced by
such insurance agent or broker in the particular jurisdiction in which such
agent or broker wrote, sold or produced such business for either PSIC or
American Independent Insurance, except for such failures to be so licensed that
would not, in the aggregate, have a material adverse effect on either PSIC or
American Independent Insurance and (ii) no such insurance agent or broker has
violated or has taken any action that, with notice or lapse of time or both,
would have violated any law except for such violations as would not have a
material adverse effect on either PSIC or American Independent Insurance.


 


SECTION 2.19                    Employee
Relations.  Except as disclosed on Schedule 2.19 hereto:


 


(a)                                  Neither
AIIHC nor any of the Subsidiaries is: 
(i) a party to, or otherwise bound by, any labor agreement, collective
bargaining agreement, or any other labor-related agreement or arrangement with
any labor union, labor organization or works council; or (ii) a party to,
involved in or, to the knowledge of Seller, AIIHC or any of the Subsidiaries,
threatened by, any labor dispute, arbitration, grievance, or unfair labor
practice charge.  No employees of AIIHC
or any of the Subsidiaries are represented by any labor organization with
respect to their employment with AIIHC or any of the Subsidiaries.


 


(b)                                 No
labor union, labor organization, works council, or group of employees of AIIHC
or any of the Subsidiaries has made a pending demand for recognition or
certification, and there are no representation or certification proceedings or
petitions seeking a representation


 


16

















 


proceeding presently pending or threatened in writing to be brought or
filed with the National Labor Relations Board or any other labor relations
tribunal or authority.  None of Seller,
AIIHC or any of the Subsidiaries has (i) any knowledge of any labor union
organizing activities with respect to any employees of AIIHC or any of the
Subsidiaries; or (ii) experienced any labor disputes, strikes or work stoppages
during the last three (3) years.


 


(c)                                  AIIHC
and each of the Subsidiaries are in material compliance with all applicable
laws respecting employment and employment practices, including, without
limitation, all laws respecting terms and conditions of employment, health and
safety, wages and hours, child labor, immigration, employment discrimination,
disability rights or benefits, equal opportunity, affirmative action, workers’
compensation, labor relations, employee leave issues and unemployment insurance.


 


(d)                                 Neither
AIIHC nor any of the Subsidiaries is delinquent in material payments to any
employees or former employees for any services or amounts required to be
reimbursed or otherwise paid.


 


(e)                                  Neither
AIIHC nor any of the Subsidiaries has received (i) notice of any charge or
complaint with respect to or relating to them pending before the Equal
Employment Opportunity Commission or any other governmental authority
responsible for the prevention of unlawful employment practices, (ii) notice of
the intent of any governmental authority responsible for the enforcement of
labor, employment, wages and hours of work, child labor, immigration, or
occupational safety and health laws to conduct an investigation with respect to
or relating to them or notice that such investigation is in progress, or (iii)
notice of any charge, complaint, lawsuit or other proceeding pending or
threatened in any forum by or on behalf of any present or former employee of
AIIHG or any of the Subsidiaries, or job applicant for employment or classes of
the foregoing, or by any governmental authority, alleging breach of any express
or implied contract of employment, any applicable law governing employment or
the termination thereof or other discriminatory or tortuous conduct in
connection with the employment relationship, including, without limitation,
allegations on account of or for (a) overtime pay (b) wages or salary (c) any
amount of vacation pay or pay in lieu of vacation time off, other than vacation
time off or pay in lieu thereof earned in or in respect of the current fiscal
year, (d) any amount of severance pay or similar benefits, (e) unemployment
insurance benefits, (f) workers’ compensation or disability benefits, (g) any
violation of any statute, ordinance, order, rule or regulation relating to
plant closings, employment terminations or layoffs, including but not limited
to the Workers Adjustment and Retraining Act (the “WARN Act”), (h) any violation of any material statute,
ordinance, order, rule or regulation relating to employee “whistleblower” or
“right-to-know” rights and protections, (i) any violation of any material
regulation relating to minimum wages or maximum hours of work, or (j)
occupational safety and health.


 


(f)                                    AIIHC
and each of the Subsidiaries are and have been in compliance with all notice
and other requirements under the WARN Act and any similar foreign, state or
local law relating to plant closings and layoffs.


 


(g)                                 The
execution of this Agreement and the consummation of the transactions
contemplated by this Agreement will not result in any breach or other violation
of


 


17

















 


any collective bargaining agreement, employment agreement, consulting
agreement or any other labor-related agreement to which AIIHC or any of the
Subsidiaries is a party.


 


SECTION 2.20                    Compensation
Arrangements; Bank Accounts; Officers and Directors.  Schedule 2.20
sets forth (a) the names, titles and current annual salary, including any
bonus, if applicable, of all present directors, officers, employees,
consultants and agents of AIIHC and each Subsidiary whose rate of annual
compensation, including any promised or customary bonus, equals or exceeds
$150,000, together with a statement of the full amount of all remuneration paid
by Seller, AIIHC or any such Subsidiary to each such person and to any director
of AIIHC or any of the Subsidiaries, during the twelve (12)-month period
preceding the date hereof, (b) the name of each bank in which AIIHC and each
Subsidiary has an account or safe deposit box, the identifying numbers or
symbols thereof and the names of all persons authorized to draw thereon or to
have access thereto, and each credit card issued to AIIHC or any Subsidiary or
any other person for which AIIHC or any Subsidiary is responsible for charges
made thereon, the issuer of such credit cards, the identifying numbers or
symbols thereof and the names of all persons to which such cards have been
issued or to whom access to such cards has been given and (c) the names and
titles of all directors and officers of AIIHC and each of the Subsidiaries and
of each trustee, fiduciary or plan administrators of each employee benefit plan
of AIIHC and each Subsidiary.


 


SECTION 2.21                    Operations Insurance. Schedule 2.21
contains a true and complete list and description of all liability, property,
workers compensation, directors and officers liability, and other similar
insurance policies or agreements that insure the business, operations, or
affairs of AIIHC and each of the Subsidiaries or affect or relate to the
ownership, use, or operations of any of the assets or properties of AIIHC or
any of the Subsidiaries. Excluding insurance policies that have expired and
been replaced by AIIHC or a Subsidiary in the ordinary course of business, no
insurance policy has been canceled within the last year except as disclosed in Schedule 2.21, and, to the knowledge
of Seller, AIIHC and each of the Subsidiaries, no threat has been made to
cancel any insurance policy of AIIHC or any of the Subsidiaries during such
period. Except as disclosed in Schedule 2.21,
all such insurance will remain in full force and effect with respect to periods
before and through the Closing. No event has occurred, including, without
limitation, the failure by AIIHC or any of the Subsidiaries to give any notice
or information or AIIHC or any of the Subsidiaries giving any inaccurate or
erroneous notice or information, which limits or impairs the rights of such
party under any such insurance policies.


 


SECTION 2.22                    Investment Portfolio and Other Assets. AIIHC and each of the Subsidiaries owns an
investment portfolio acquired in the ordinary course of business, and a true
and complete list of the securities and other investments in such investment
portfolio, as of March 31, 2004  with
respect to mortgage loans and debt and equity securities and other investments,
with true and correct information included thereon as to the cost of each such
investment and the market value thereof as of such date, is listed in Schedule 2.22. Except as otherwise set
forth in Schedule 2.22, (i)
none of the investments included in such investment portfolio is in default in
the payment of principal or interest or dividends or impaired to any extent,
(ii) all investments included in such investment portfolio comply with all material
insurance laws and regulations of each of the states to which AIIHC and each of
the Subsidiaries is subject relating thereto, (iii) such investments constitute
all of the investments or holdings (including loans to agencies) of AIIHC and
each of the Subsidiaries other than any disclosed in


 


18

















 


Schedule 2.22 and (iv) AIIHC or the Subsidiaries, as the case
may be, has legal and valid title to such investments, free and clear of all
Liens.


 


SECTION 2.23                    Reinsurance Agreements.  Schedule 2.23 is a true and complete list of all
reinsurance treaties and contracts applicable to AIIHC or any of the
Subsidiaries (whether as ceding insurer or assuming reinsurer) (individually,
an “Existing Reinsurance Agreement”
and collectively, the “Existing Reinsurance
Agreements”), copies of which shall be delivered or made available
to Purchaser prior to the Due Diligence End Date.  Each of the Existing Reinsurance Agreements is valid and binding
in all material respects in accordance with its terms and is in full force and
effect.  None of the Existing
Reinsurance Agreements will terminate because of a change in control of AIIHC
or any of the Subsidiaries, or otherwise as a result of a transaction
contemplated hereby.  No other party to
any Existing Reinsurance Agreement has given notice to AIIHC or any of the
Subsidiaries that intends to terminate or cancel any such Existing Reinsurance
Agreement.  Neither Seller, AIIHC nor
any Subsidiary, nor, to the knowledge of the Seller, AIIHC or the
Subsidiaries, any other party to an
Existing Reinsurance Agreement, is in default in any material respect as to any
provision thereof.  Except for reserves
for collectibility under Existing Reinsurance Agreements identified on Schedule 2.23, AIIHC and each of the Subsidiaries that has
ceded reinsurance pursuant to any such Existing Reinsurance Agreement is
entitled to take full credit in its financial statements for all amounts
recoverable with such credit accounted for (i) pursuant to SAP, as a reduction
of such party’s loss reserves, and (ii) pursuant to GAAP, as a reinsurance
recoverable asset.


 


SECTION 2.24                    RESERVED


 


SECTION 2.25                    Producers.  Schedule 2.25(a) lists each
Person writing, selling or producing, either directly or through reinsurance
assumed, Insurance Contracts for the Business that in the aggregate accounted
for 1% or more of the premium income of the Business for the year ended
December 31, 2003 or for the quarter ended March 31, 2004.  Except as disclosed in Schedule 2.25(b)
hereto, since January 1, 2003, no Persons writing, selling, or producing,
either directly or through reinsurance assumed, Insurance Contracts for the
Business, that individually or in the aggregate accounted for 10% or more of
the premium income of the Business for the year ended December 31, 2003,
have terminated or, to the knowledge of the Seller, AIIHC or the Subsidiaries,
threatened to terminate its relationship with PSIC or American Independent
Insurance.  Each material contract
between PSIC or American Independent Insurance and a producer of business
therefor (a “Producer Agreement”) is valid,
binding and in full force and effect in accordance with its terms, and, to the
knowledge of the Seller, AIIHC or the Subsidiaries, none of the parties thereto
is in default with respect to any such Producer Agreement, other than for such
failures to be valid, binding and in full force and effect or such defaults
which would not, individually or in the aggregate, have a material adverse
effect on any Subsidiary.  No party to
any Producer Agreement has given notice to PSIC or American Independent
Insurance that it intends to terminate or cancel any Producer Agreement as a
result of the transactions contemplated hereby. Since January 1, 2003, to
the knowledge of the Seller, AIIHC or the Subsidiaries, at the time PSIC or
American Independent Insurance paid commissions to any producer in connection
with the sale of insurance contracts, each such producer was duly licensed if
required under Applicable Law in the particular jurisdiction in which such
producer sold such insurance contracts for such company, except where in such
cases


 


19

















 


where there
would not be, individually or in the aggregate, a material adverse effect on American
Independent Insurance or PSIC. 


 


SECTION 2.26                    No Broker.  There is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
Seller, AIIHC or any Subsidiary which might be entitled to any fee or
commission from Purchaser upon consummation of the transactions contemplated by
this Agreement.


 


SECTION 2.27                    Books and Records.  The books and records, including, but not
limited to, documents, databases, administrative records claim records, policy
files, sales records, lists of agents and brokers, files and records relating
to regulatory matters or correspondences with regulatory authorities,
reinsurance records, underwriting records, accounting records and all other
records, data and information (in whatever form maintained), in the possession
or control of Arch Parent, Seller, AIIHC or the Subsidiaries relating to the
conduct of the Business, are consistent with and accurately reflect the
Business in all material respects.


 


SECTION 2.28                    Environmental Matters.  Except as set forth in Schedule 2.28
hereto:


 


(a)                                  There
is no pending or, to the knowledge of Seller, AIIHC and the Subsidiaries,
threatened written claim, lawsuit, administrative proceeding, order, judgment
or decree against or involving Seller, AIIHC or any Subsidiary under or
pursuant to any Environmental Law (as defined below).  Neither Seller, AIIHC or any Subsidiary has received written
notice from any person, including but not limited to any governmental
authority, alleging that Seller, AIIHC or any Subsidiary has been or is in
violation or potentially in violation of any applicable Environmental Law or
otherwise may be liable under any applicable Environmental Law, or is subject
to investigation pursuant to any Environmental Law.


 


(b)                                 The
Seller and Arch Parent have delivered to Purchaser true and complete copies of
all environmental studies in their possession made in the last five years
relating to real property owned by any of AIIHC or the Subsidiaries (together
with all improvements or fixtures thereon, the “Owned Real Property”), all real property in which any of AIIHC
or the Subsidiaries has a leasehold interest (the “Leased Real Property”) and any other property or facility
previously owned, operated or leased by the AIIHC or the Subsidiaries.


 


(c)                                  None
of Seller and Arch Parent has, and to the knowledge of Arch Parent, Seller,
AIIHC and the Subsidiaries, no other person has, released, discharged, or
otherwise disposed, of any Hazardous Substances (as defined below) on, beneath
or adjacent to the Owned Real Property, Leased Real Property or any property
formerly owned, operated or leased by AIIHC or the Subsidiaries, except for
releases of Hazardous Substances that are not likely to result in a claim
against AIIHC or the Subsidiaries or are not likely to require any of them to
conduct an environmental cleanup.


 


(d)                                 None
of Seller, AIIHC or any Subsidiary has entered into any agreement, including,
without limitation, policies of insurance, that would require them to pay to,
reimburse, guarantee, pledge, defend, indemnify or hold harmless any person
from or against any liabilities or costs arising out of or in connection with
(i) generation, manufacturing, use, transportation or


 


20

















 


disposal of Hazardous Substances, or otherwise arising in connection
with or under Environmental Laws and (ii) exposure to asbestos or asbestos
containing materials, or property damage allegedly caused by the presence of
asbestos or asbestos containing materials.


 


(e)                                  To
the knowledge of Arch Parent, Seller, AIIHC and the Subsidiaries, none of AIIHC
or the Subsidiaries holds a security interest in any property that is subject
to a claim under applicable Environmental Laws or at which there has been a
release of Hazardous Substances that is likely to result in an obligation to
conduct an environmental cleanup.


 


(f)                                    For
purposes of this Agreement, (i) “Environmental Laws”  shall mean all foreign, federal, state and local laws (including
common law), regulations, rules, ordinances, orders, decrees, and judgments
relating to pollution or protection of the environment or human health and
safety, including, without limitation, laws relating to releases or threatened
releases of Hazardous Substances into the indoor or outdoor environment
(including, without limitation, ambient air, surface water, groundwater, land,
surface and subsurface strata) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, release, transport or handling
of Hazardous Substances and all laws and regulations with regard to
recordkeeping, notification, disclosure and reporting requirements respecting
Hazardous Substances, and all laws relating to endangered or threatened species
of fish, wildlife and plants and the management or use of natural resources;
and (ii) “Hazardous Substance”  shall
mean (a) any petrochemical or petroleum products, radioactive materials,
asbestos, urea formaldehyde foam insulation, transformers or other equipment
that contain dielectric fluid containing polychlorinated biphenyls, and radon
gas; (b) any chemicals, materials or substances defined as or included in the
definition of “hazardous substances,” “hazardous wastes,” “hazardous
materials,” “restricted hazardous materials,” “extremely hazardous substances,”
“toxic substances,” “contaminants” or “pollutants” or words of similar meaning
and regulatory effect; or (c) any other chemical, material or substance,
exposure to which is prohibited, limited, or regulated by any applicable Environmental
Law.


 


SECTION 2.29                    Third Party Purchaser.  Seller has entered into a stock purchase
agreement, as amended, in January 2004 (the “Third Party
Agreement”) with an entity (the “Third Party”)
relating to the sale of AIIHC and the Subsidiaries.  Neither the Third Party Agreement nor any other agreement between
Seller or any of its Affiliates and the Third Party or any of its affiliates
prohibits Arch Parent or Seller from entering into this Agreement.  The Third Party Agreement may be terminated
by Seller at any time upon three (3) calendar days written notice from Seller
to the Third Party.


 


ARTICLE III



REPRESENTATIONS AND WARRANTIES OF PURCHASER


 


Purchaser hereby represents and warrants to Seller as follows:


 


SECTION 3.01                    Corporate Organization; Subsidiaries.  Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.


 


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Copies of the
certificate of incorporation and by-laws of Purchaser, with all amendments
thereto to the date hereof, have been furnished to Seller or their
representatives, and such copies are accurate and complete as of the date
hereof.


 


SECTION 3.02                    Qualification
to Do Business.  Purchaser has the
requisite corporate power and authority and all necessary governmental
authority to own, operate or lease the properties that it purports to own,
operate or lease and to carry on its business as it is now being conducted, and
is duly qualified to do business as a foreign corporation, and is in good
standing, in each jurisdiction where the character of its properties owned,
operated or leased or the nature of its activities makes such qualification
necessary, except any such jurisdiction where the failure to be so qualified and
in good standings would not be reasonably expected to prevent or materially
delay the consummation of the transactions contemplated by this Agreement.


 


SECTION 3.03                    Authorization
and Validity of Agreement. 
Purchaser has all requisite corporate power and authority to enter into
this Agreement to carry out its obligations hereunder and to consummate the
transactions contemplated hereby.  The
execution and delivery of this Agreement and the performance of its obligations
hereunder have been duly authorized by all necessary corporate action of
Purchaser, and subject to the receipt of regulatory approvals described on Schedule 2.06, no other proceedings on the part or in
respect of Purchaser, is necessary to authorize such execution, delivery and
performance.  This Agreement has been
duly executed by Purchaser and constitutes a valid and binding obligation of
Purchaser, enforceable against Purchaser in accordance with its terms, except
as may be limited by applicable bankruptcy, insolvency, moratorium or similar
laws of general application relating to or affecting creditors’ rights
generally and except for the limitations imposed by general principles of
equity.


 


SECTION 3.04                    Non-Contravention.  The execution, delivery and performance of
this Agreement and the transactions contemplated hereby will not (i) result in
a breach of any of the terms of, or constitute a violation of or default under
the organizational documents of Purchaser, (ii) result in a breach of any of
the terms of, or constitute a violation of or default under, result in any
modification of, accelerate or permit the acceleration of the performance
required by, or otherwise give any other contracting party the right to
terminate any contract, indenture or other instrument or agreement by which Purchaser,
or any of its respective assets are subject or bound, (iii) violate any
statute, law or regulation of any jurisdiction or order, judgment, injunction,
award or decree of any court or government of competent jurisdiction by which
Purchaser is bound; except in the case of clause (ii) and (iii) above for such
breaches, violations or defaults which would not be reasonably expected to
prevent or materially delay the consummation of the transactions contemplated
by this Agreement.


 


SECTION 3.05                    Consents.  Except as disclosed on Schedule 2.06
hereto, no consent, waiver, authorization, approval, order, license,
certificate or permit of or from, or registration, declaration or filing with,
or notice to any court or other tribunal, governmental agency or any other
person, nor under any contract, indenture, mortgage, lease, license or other
agreement or instrument to which Purchaser or any of its subsidiaries is a
party or by which Purchaser or any of its subsidiaries, or any of their
respective assets, is subject or bound, is required by or with respect to
Purchaser in connection with the execution, delivery or performance of this
Agreement and the transactions contemplated hereby.


 


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SECTION 3.06                    No Broker.  There is no investment banker, broker,
finder or other intermediary which has been retained by or is authorized to act
on behalf of Purchaser which might be entitled to any fee or commission from
Seller or any of their respective Affiliates upon consummation of the
transactions contemplated by this Agreement.


 


SECTION 3.07                    Litigation.  There is no litigation, investigation,
proceeding or other claim pending or, to the knowledge of Purchaser, threatened
involving Purchaser or any of its assets or any subsidiary thereof or any of
its assets which would be reasonably expected to prevent or materially delay
the consummation of the transactions contemplated by this Agreement.  Neither Purchaser nor any of its
subsidiaries is subject to any outstanding orders, writs, injunctions or
decrees of any court, governmental agency or arbitration tribunal which would
be reasonably expected to prevent or materially delay the consummation of the
transactions contemplated by this Agreement.


 


SECTION 3.08                    Purchase
for Investment.


 


(a)                                  Purchaser
is acquiring the AIIHC Common Shares for its own account and not with a view to
the distribution of the AIIHC Common Shares. 
Purchaser acknowledges that the AIIHC Common Shares have not been
registered under the Securities Act of 1933, as amended, and may not be
transferred or sold in the absence of registration under the Securities Act of
1933, as amended, or an exemption therefrom.


 


(b)                                 Purchaser
has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of its investment in the AIIHC
Common Shares as contemplated by this Agreement, and is able to bear the
economic risk of such investment for an indefinite period of time.  It has been furnished access to such
information and documents as it has requested and has been afforded an
opportunity to ask questions of and receive answers from representatives of the
Companies and the Subsidiaries concerning the terms and conditions of this
Agreement and the purchase of the AIIHC Common Shares contemplated hereby.


 


SECTION 3.09                    Financing.  Purchaser (i) on the date hereof has binding
commitments for, and (ii) on the Closing Date will have, sufficient funds to
enable Purchaser to pay for the AIIHC Common Shares to be purchased pursuant to
the terms hereof, to perform its obligations under this Agreement and to pay
all fees, expenses and other amounts related to the transactions contemplated
by this Agreement payable by it.


 


ARTICLE IV



COVENANTS AND OTHER AGREEMENTS


 


SECTION 4.01                    Conduct of
Business.  From the date hereof
through the Closing, except as otherwise consented to by Purchaser in writing,
as specifically contemplated by this Agreement or as set forth on Schedule 4.01, Arch Parent and Seller
shall cause AIIHC and each Subsidiary to, and AIIHC and each Subsidiary shall,
carry on the Business in, and only in, the ordinary course in substantially the
same manner as conducted since December 31, 2003.  Without limiting the generality of the foregoing,
from the date hereof through the Closing,


 


23

















 


except as
otherwise consented to by Purchaser in writing, as specifically contemplated by
this Agreement or as set forth on Schedule 4.01,
Arch Parent and Seller shall cause AIIHC and each Subsidiary not to:  (a) incur any indebtedness for borrowed
money other than trade payables in the ordinary course of the conduct of the
Business consistent with past practice, (b) issue or sell any debt or equity
securities or grant or issue any option, warrant or other right to purchase or
acquire any such securities or institute any split, combination or
reclassification of any such securities or
issue or authorize any issuance of any other securities in respect of, in lieu
of or in substitution for shares of AIIHC’s or any Subsidiary’s outstanding
capital stock, (c) (i) change their authorized or issued stock, (ii)
reclassify, combine, split, subdivide, purchase, redeem, retire, issue sell, or
otherwise acquire of dispose of any shares of their respective capital stock,
(iii) grant or issue any option, warrant or other right to purchase or acquire
any such shares or (iv) issue any security convertible into capital stock, (d)
make any investments that are not in compliance with the investment guidelines
of AIIHC and the Subsidiaries, which investment guidelines are attached hereto
as Exhibit A, except as required by
law or regulation, (e) amend or change the charter, by-laws or other
organizational documents of AIIHC or any of the Subsidiaries, (f) merge AIIHC
or any Subsidiary with any other entity, (g) liquidate, dissolve or wind up, or
dispose of all or substantially all of the assets of AIIHC or any Subsidiary,
(h) organize any new subsidiary of any AIIHC or any Subsidiary, (i)
abandon, allow to lapse, or encumber any of its material properties or assets,
tangible or intangible, including the Intellectual Property, except for Liens
incurred in the ordinary course of business, consistent with past practice, (j)
institute any increase in the compensation or bonuses payable or to become
payable to any of its directors, officers or employees, or make any changes in
its personnel policies or employee benefits, in either case other than in the
ordinary course of business consistent with past practice, or grant to any such director, officer or other employee
any increase in severance or termination pay, or enter into any modification,
amendment, waiver or consent with respect to any employment, severance, change
of control, termination or similar agreement, arrangement or plan (oral or
otherwise) with any director, officer or other employee, (k) declare,
set aside or pay any dividends, returns of capital or any other distributions
to Seller or any of its Affiliates, AIIHC or any of the Subsidiaries (l) make any change in the accounting practices or
policies, or in any assumption underlying such practices or policies, or in any
method of calculating any bad debt, contingency or insurance, except as
is required by GAAP, SAP, law or
regulation, (m) enter into any agreements or transactions with any of
AIIHC, the Subsidiaries or Seller or any of its Affiliates (other than in the
ordinary course of business, consistent with past practice), (n) make any material amendment to the insurance
policies in force of AIIHC or any Subsidiary or make any change in the
methodology used in the determination of the reserve liabilities of AIIHC or
any Subsidiary or any reserves contained in the Quarterly or Annual Financial
Statements except as required by GAAP, SAP, law or regulation, (o) close any
claim file prior to the final disposition of such claim other than in the
ordinary course of business consistent with past practice, (p) make any
termination, amendment or entrance into as ceding or assuming insurer any
reinsurance, coinsurance or other similar agreement or any trust agreement or
security agreement relating thereto, except in the ordinary course of business
consistent with past practice, (q) make any introduction of any insurance
policy or any changes in its customary marketing, pricing, underwriting,
investing, financial reporting, tax or actuarial practices and policies, except
in the ordinary course of business consistent with past practice or as required
by GAAP, SAP, law or regulation, (r) cancel any liability owed to AIIHC or any of
the Subsidiaries by any other person or entity other than immaterial amounts
owed by a person or entity who is


 


24

















 


not Seller or an Affiliate or in the ordinary course of business
consistent with past practice or pursuant to a binding contractual obligation,
(s) make any write-off or write-down of, or any determination to write-off or
write-down, which are material in the aggregate, the assets or properties
(other than any statutory write-down of investment assets which is not related
to a permanent impairment of value or as required by GAAP, SAP, law or
regulation) of AIIHC or any of the Subsidiaries, (t) make any expenditure or
commitment for additions to property, plant, equipment, or other tangible or intangible
capital assets or properties of AIIHC or any of the Subsidiaries which exceeds $100,000 individually or in the
aggregate, (u) (i) make a request for a Tax ruling from or enter into a
closing agreement with, any taxing authority, (ii) settle or compromise any
claim, action, litigation, proceeding, arbitration, investigation, audit or
controversy relating to Taxes or (iii) make any elections with respect to Taxes
or change any method of accounting for Tax purposes (v) take any action that would prevent or materially impair the ability
of Arch Parent or Seller to consummate the transactions contemplated by this
Agreement, or (w) enter into any contract or arrangement to take any of the
actions prohibited in this Section 4.01.


 


SECTION 4.02                    Access and
Information.  Seller shall cause
AIIHC and the Subsidiaries and their counsel and accountants to give Purchaser
and its representatives reasonable access, during normal business hours and
upon reasonable prior notice, and provided such access does not unduly
interfere with the operation of the Business, throughout the period ending upon
the earlier to occur of the Closing Date or the termination of this Agreement
pursuant to Article VII hereof, to the books, leases, contracts,
commitments, minutes, documents, instruments and records of AIIHC and each
Subsidiary, and to the premises and reasonable number of employees of AIIHC and
the Subsidiaries, and shall cause to be furnished to Purchaser and their
representatives during such period such information concerning the affairs of
AIIHC and the Subsidiaries as Purchaser may reasonably request.


 


SECTION 4.03                    Employee
Benefits.


 


(a)                                  Purchaser
shall honor and shall cause its Affiliates (including, after the Closing, AIIHC
and the Subsidiaries) to honor all Company Plans maintained by AIIHC or the
Subsidiaries in accordance with their terms as in effect immediately before the
Closing, subject to any amendment or termination thereof that may be permitted
by such terms.  For a period of one year
following the Closing, Purchaser shall either (i) continue to maintain such
Company Plans as in effect immediately prior to the Closing (excluding any
Company Plans providing medical benefits); provided, however,
that changes may be made to such Company Plans to the extent necessary to
comply with applicable law, or so long as clause (ii) of this
Section 4.03(a) is complied with and provided further that, unless clause
(ii) of this Section 4.03(a) is complied with, for such one-year period
Purchaser shall not reduce medical benefits to a level with average per
employee employer costs below those applicable under the applicable Company
Plans as of December 31, 2003, or (ii) provide employees of AIIHC and the
Subsidiaries with employee welfare, pension and savings plans which, in the aggregate,
are substantially no less favorable than those provided to similarly situated
employees of Purchaser from time to time. 
Nothing in this Section 4.03 shall be deemed to require that the
employment of any employee of AIIHC or any of the Subsidiaries as of the
Closing be continued for any specific period of time after the Closing.


 


25

















 


(b)                                 To
the extent service is relevant for purposes of eligibility, participation or
vesting (but not the accrual of benefits) under any employee benefit plan,
program or arrangement established or maintained by Purchaser for the benefit
of employees of AIIHC and the Subsidiaries, the employees of AIIHC and the
Subsidiaries shall be credited for service accrued as of the Closing with AIIHC
and the Subsidiaries to the extent such service was credited under a similar
Company Plan.


 


SECTION 4.04                    RESERVED


 


SECTION 4.05                    RESERVED


 


SECTION 4.06                    RESERVED


 


SECTION 4.07                    Consents
and Conditions.  Upon the terms and
subject to the conditions of this Agreement, each of the parties hereto shall
cooperate, and use their respective reasonable best efforts to, make all
filings and agree to use all reasonable best efforts to obtain any required
third party and governmental consents to the transactions contemplated by this
Agreement, and to cause each of the conditions and obligations of Seller and
Purchaser hereunder to be satisfied. 
Consistent with such provision, as soon as reasonably practicable following
the Due Diligence End Date (as defined herein), but no later than July 2,
2004, Purchaser shall complete and deliver to the Offices of the Delaware,
Indiana, Maryland, Ohio and Pennsylvania Insurance Departments, as applicable,
the initial filings of the Form A relating to Purchaser’s purchase of the AIIHC
Common Shares.  Prior to Closing,
Purchaser shall respond to any written inquiry made by either such Office
relating to the Form A within five (5) business days of the receipt of any such
written inquiry.  In addition,
Purchaser, on the one hand, and Seller, AIIHC and the Subsidiaries, on the
other hand, hereby agree to mutually cooperate during any pre-Closing
discussions with ratings agencies regarding AIIHC and the Subsidiaries which
are deemed appropriate and reasonable by both Seller and Purchaser, including
participation in meetings and providing documents as may be reasonably
requested by such ratings agencies.


 


SECTION 4.08                    Reinsurance
Agreements.


 


(a)                                  Initial
Term.  On the Closing Date, Purchaser shall cause PSIC and American
Independent Insurance (the “Ceding Companies”), and Seller shall cause
one or more Affiliates of Seller designated by Seller (“Designated Affiliate”), to enter into
reinsurance agreements (the “Reinsurance Agreements”) with (A) a quota share percentage
for Policy Year (as defined below) 2004 of 80% and (B) a quota share percentage
for Policy Year 2005 of 80%, provided that, if total direct written premiums (“DWP”)
for the Ceding Companies for Policy Year 2005 exceeds $100,000,000, the quota
share percentage for Policy Year 2005 shall be reduced to the percentage at
which DWP ceded to the Designated Affiliate for Policy Year 2005 equals
$80,000,000 (collectively, the “Initial Term”)
on the terms set forth in the 80% quota share reinsurance agreement in effect
as of the date hereof between American Independent Insurance and ARC attached
as Exhibit B (the “Current Agreement”), with the following
additional terms: (i) the Reinsurance Agreements shall not cover lines of
business or risk in the states that are not covered by the Current Agreement
unless approved in advance and in writing by Seller (or Designated Affiliate);
(ii) in the event of a material breach by the Ceding Company


 


26

















 


of a Reinsurance Agreement that remains uncured for 45 days, following
written notice thereof (except that there shall be no cure period for a final
arbitral determination of fraud), the Designated Affiliate may terminate the
Reinsurance Agreements with respect to future writings; (iii) in the event of
termination of Bill Lockhorn’s (the “Executive”) employment as chief executive
officer of AIIHC and the Subsidiaries (A) for any reason other than as
described in clause (iii)(B) of this Section 4.08(a) and a replacement for
him reasonably satisfactory to the Designated Affiliate shall not have been
employed by the Ceding Companies within 120 days, or in the case of termination
by the Executive for Good Reason (as defined below) within 60 days, after such
termination (it being understood that the Designated Affiliate’s consent must
not be unreasonably withheld) or (B) due to termination by Purchaser or any of
its Affiliates without Cause (as defined below), then the Designated Affiliate
may terminate the Reinsurance Agreements with respect to future writings; (iv)
any rate changes with respect to the business covered by the Reinsurance
Agreements must be reasonably satisfactory to the Designated Affiliate; (v) the
Reinsurance Agreements shall provide that, (A) so long as the aggregate quota share
percentages of the Designated Affiliates are greater than 50% and (B)(i) in the
event that the Ceding Companies implement any claims administration practices
which materially and adversely impact the Designated Affiliates’ exposure to
loss under the Reinsurance Agreements or (ii) the loss ratio on the business
subject to any of the Reinsurance Agreements shall equal 75% or more, Seller
(and its Designated Affiliates) shall have the right, but not the obligation,
to take such action, in the name of the Ceding Company and at the expense of
Seller (or Designated Affiliate), as Seller (or Designated Affiliate)
deems reasonably necessary and appropriate for the handling of any claim
or claims, including, but not limited to, the selection of counsel and/or third
party administrators; and (vi) in the event that (1) the Designated Affiliate’s
domiciliary state insurance department orders it to cease writing business or
cease its operations, (2) the Designated Affiliate has been determined or
declared “insolvent” by its domiciliary state, or has been placed into
liquidation or receivership (whether voluntary or involuntary), or there has
been instituted against it proceedings for the appointment of a receiver,
liquidator, rehabilitator, conservator, or trustee in bankruptcy, or other
statutory agent known by whatever name, to take possession of its assets or
control of its operations, (3) the Designated Affiliate’s A.M. Best rating is
reduced below A-, or (4) the Designated Affiliate’s surplus has been reduced
below 50% of such surplus as of the date hereof (any of the foregoing, a “Reinsurer Triggering Event”), the Seller
shall (A) immediately notify Purchaser (both orally and in writing) of such
Reinsurer Triggering Event and (B) at the sole option of Seller (or its
Designated Affiliate) (for the avoidance of doubt, such option requires Seller
(or its Designated Affiliate) to elect to take the actions required by one of
the following clauses (i) and (ii)) either, (i) cooperate fully, at the sole
cost and expense of Purchaser for arranging and implementing such coverage,
with Purchaser, PSIC and American Independent Insurance, in all actions
necessary to obtain a substitute reinsurer acceptable to Purchaser, PSIC and
American Independent Insurance to either (x) effect novations under which such
substitute reinsurer shall assume all liability under such Reinsurance
Agreements without any interruption of reinsurance coverage or (y) assume all
liability of Ceding Companies reinsured under the Reinsurance Agreements on terms
acceptable to Purchaser, PSIC and American Independent Insurance without any
interruption of reinsurance coverage or (ii) cause the Designated Affiliate to
post collateral with respect to the business subject to such Reinsurance
Agreements on terms reasonably acceptable to Purchaser.  For the avoidance of doubt, (a) collateral
on terms reasonably acceptable to Purchaser shall consist of either a letter of
credit or a trust complying with Pennsylvania or Ohio, as applicable, or such


 


27

















 


other state of domicile as applicable, credit for reinsurance
regulations and (b) the Designated Affiliate will be fully released from the
Reinsurance Agreements in the case of clause (vi)(B)(i) above upon
implementation of the replacement reinsurance coverage.  As used in this Section 4.08, the terms
(i) “Policy
Year” shall mean the calendar year; (ii) “Cause” shall mean  (a)
theft or embezzlement by the Executive with respect to the Ceding Companies and
the Subsidiaries; (b) malfeasance or gross negligence in the performance of the
Executive’s duties; (c) the commission by the Executive of any felony or any
crime involving moral turpitude; (d) willful or prolonged absence from work by
the Executive (other than by reason of disability due to physical or mental
illness) or failure, neglect or refusal by the Executive to perform his duties
and responsibilities without the same being corrected within ten (10) days
after being given written notice thereof; (e) continued and habitual use of
alcohol by the Executive to an extent which materially impairs the Executive’s
performance of his duties without the same being corrected within ten (10) days
after being given written notice thereof; (f) the Executive’s use of
illegal drugs without the same being corrected within ten (10) days after being
given written notice thereof; and (iii) “Good Reason” shall mean, without the
Executive’s written consent, (a) the material diminution of any material duties
or responsibilities of the Executive without the same being corrected within
ten (10) days after being given written notice thereof; or (b) a reduction in
the Executive’s base salary.


 


(b)                                 Option
During Additional Term.  The Purchaser agrees that Seller or one or
more Designated Affiliates of Seller shall have the option, but not the
obligation, to provide quota share reinsurance for the four-year period
following the Initial Term (the “Additional Period”) with a quota share
percentage of up to the lesser of (A) 60%  and (B) the quota share percentage that
would result in DWP of $60,000,000 ceded to the Designated Affiliate in each
year within such four-year term on substantially the same terms and conditions
contained in the Reinsurance Agreements of the prior Policy Year (whether
provided by any Designated Affiliate or a third party).  Not less than 90 days prior to the
commencement of the Policy Year (the “Notice Period”) of each such year of the
four-year period, Seller (or Designated Affiliate) shall inform the Ceding
Companies whether it is exercising its option under this Section 4.08(b)
for such Policy Year, provided that, to the extent that Seller (or Designated
Affiliate) desires to reduce its quota share percentage for any Policy Year by
more than 20% or $20,000,000 from the prior year amount, such Notice Period
shall be 120 days prior to the commencement of such Policy Year.  Upon receiving such notice, Purchaser shall
cause the Ceding Companies to take such actions as are necessary, including the
execution and delivery of the documentation satisfactory to Seller (or
Designated Affiliate), to effect the cession required by the exercise of such
option.  Seller will forfeit the option
set forth in this Section 4.08(b) solely with respect to the amount of DWP
not reinsured by Seller (or Designated Affiliate) for any portion of the
Additional Period following which (i) Seller (or any of its Designated
Affiliates) elects not to exercise this option in any given year or (ii) any
Reinsurance Agreement has been previously terminated by any Designated
Affiliate.


 


SECTION 4.09                    Interim Financial Statements.  After
the date of this Agreement and prior to the Closing Date, Seller shall deliver
to Purchaser (i) any and all monthly financial statements for AIIHC and/or any
of the Subsidiaries, audited or unaudited, prepared for the management of such
companies, within seven (7) business days following the applicable month-end
and (ii) any and all quarterly financial statements for AIIHC and/or any of the
Subsidiaries, audited or unaudited, at such time as such quarterly financial
statements are made available to


 


28

















 


Arch Parent and/or Seller or their Affiliates, but in no event later
than fifteen (15) days following the applicable quarter-end.


 


SECTION 4.10                    Non-Solicitation.  Each of Arch Parent and Seller agrees, and
agrees to cause their Affiliates (including AIIHC and the Subsidiaries), not
to, directly or indirectly, through any officer, director, employee,
Representative (as defined below) or agent thereof, (i) solicit, initiate or
encourage any inquires or proposals that constitute, or would lead to, a
proposal or offer for a merger, consolidation, business combination, sale of
substantial assets, sale of shares of capital stock or similar transactions involving
AIIHC or any Subsidiary or the assets or capital stock thereof, other than a
transaction with Purchaser or an Affiliate of Purchaser (any of the foregoing
inquiries or proposals being referred to herein as an “Acquisition
Proposal”) or (ii) engage in any negotiations or discussions
concerning, or provide any non-public information to any person relating to,
any Acquisition Proposal; provided, however, that during the Initial
Period (as defined below) Seller may communicate with the Third Party and
engage in discussions regarding the transactions contemplated by the Third
Party Agreement.  Arch Parent and Seller
agree to notify Purchaser immediately after receipt by either of them, AIIHC or
any Subsidiary of any Acquisition Proposal, by any party other than the Third
Party, such notice to be communicated orally and in writing and to include the
identity of the offeror and the terms and conditions of such Acquisition
Proposal.  In respect of any party, the
term “Representatives” shall mean
the officers, directors, employees, advisors, agents, representatives,
Affiliates, security holders, accountants, attorneys, actuaries or anyone else
acting on behalf of such party or such persons.  “Initial Period”
means the period from the date hereof through the date on which Purchaser’s
termination right relating to due diligence set forth in Section 7.01(d)
has terminated or been waived by the Purchaser or otherwise expired.  Arch Parent and Seller agree, and agree to
cause their Affiliates and Representatives to, immediately cease any existing
discussions or negotiations with any third party, other than the Third Party,
with respect to an Acquisition Proposal. 
Seller shall not consummate the transactions contemplated by the Third
Party Agreement or any amendment thereto or replacement thereof.  Upon conclusion of the Initial Period,
unless Purchaser has terminated this Agreement pursuant to
Section 7.01(d), Seller shall
promptly notify the Third Party that Seller has entered into this Agreement and
that the closing of the transactions contemplated hereby remain subject to
regulatory approval, and Seller shall cease, and cause its Affiliates and
Representatives to cease, any and all discussions with the Third Party relating
to any Acquisition Proposal.  Unless the
Third Party Agreement has already been terminated, Seller shall, within two (2)
business days of the receipt of all of the state insurance regulatory approvals
necessary to consummate the transactions contemplated by this Agreement,
terminate the Third Party Agreement pursuant to the terms thereof.


 


SECTION 4.11                    Contributions/Redemption.  Arch Parent hereby agrees that it will cause
(i) ARL and Seller to make the Contributions and (ii) AIIHC to complete the
Redemption, in each case, prior to the Closing Date on terms satisfactory to
Arch Parent.


 


SECTION 4.12                    Notification
of Breach.  Each party shall give
each other prompt notice after it has obtained knowledge of (a) any fact or
circumstances which renders untrue, incorrect or misleading in any material respect
any of the representations and warranties made by it or the other party hereto
in this Agreement as of the date such representation and warranty was made, (b)
any failure on its part or the part of the other party hereto to comply with or
satisfy in


 


29

















 


any material
respect any covenant, condition or agreement which they are to comply with or
satisfy under this Agreement or (c) any adverse change affecting its ability or
the ability of the other party hereto to perform its obligations under this
Agreement.  Except as provided in
Section 6.06 and Section 5.07, in no event shall any disclosure of
any such breach or inaccuracy impair the rights and remedies of any party
hereto with respect to any breach or inaccuracy by any other person arising
prior to such disclosure.


 


SECTION 4.13                    Settlement
of Accounts with Affiliates; Termination of Agreements.  Except as set forth on Schedule 4.13(a),
prior to Closing, (i) AIIHC and the Subsidiaries shall pay off all payables and
other amounts due or otherwise owed by any of them to Seller or any Affiliate
of Seller (other than AIIHC and the Subsidiaries), and Seller shall and shall
cause each of its Affiliates (other than AIIHC and the Subsidiaries) to pay off
all payables and other amounts due or otherwise owed by any of them to AIIHC or
any Subsidiary, and (ii) Seller shall cause AIIHC and the Subsidiaries to
terminate the agreements set forth on Schedule 4.13(b).


 


ARTICLE V


 


TAX
MATTERS


 


SECTION 5.01                    Tax
Indemnification.


 


(a)                                  Arch
Parent and Seller shall be liable to, and shall indemnify, protect, defend and
hold harmless the Purchaser Indemnified Parties (as hereinafter defined)
against any and all claims, losses, damages, liabilities, assessments,
settlements, costs and expenses arising from or in connection with any
liability for Taxes of AIIHC or any Subsidiary (“Tax Losses”) sustained by any Purchaser Indemnified Party
attributable or otherwise relating to (i) any Pre-Closing Tax Period (as
hereinafter defined) and (ii) any liability pursuant to Treasury Regulations
Section 1.1502-6 (or any comparable provision under state, local or
foreign law or regulation imposing several liability upon members of a
consolidated, combined, affiliated or unitary group) for any Pre-Closing Tax
Period; provided, however, that with respect to current
period Taxes not due and payable as of the Closing Date, the Purchaser
Indemnified Parties shall be entitled to indemnity pursuant to this
Section 5.01(a)  only to the extent
that the amount of such Taxes exceeds the amount accrued on the financial
statements of AIIHC and any Subsidiary prepared in accordance with GAAP.  Purchaser shall be  liable to, and shall indemnify, protect, defend and hold
harmless Seller Indemnified Parties (as hereinafter defined) against any and
all Tax Losses sustained by any Seller Indemnified Party attributable or
otherwise relating to any Post-Closing Tax Period (as hereinafter
defined).  The term “Pre-Closing Tax Period” shall mean all
taxable periods ending on or before the Closing Date and the portion ending on
and including the Closing Date of any taxable period that includes (but does
not end on) the Closing Date.  The term
“Post-Closing Tax Period” shall
mean all taxable periods that begin after the Closing Date and the portion beginning
on the day after the Closing Date of any taxable period that includes (but does
not end on) the Closing Date.


 


(b)                                 For purposes of this Section 5.01 and for allocating Taxes to a
Pre-Closing Tax Period or a Post-Closing Tax Period, in the case of any Taxes
that are payable for a Tax period that includes (but does not end on) the
Closing Date, the portion of such Taxes 


 


30

















 


attributable to the Pre-Closing Tax Period
shall (i) in the case of any Taxes other than Taxes based upon or related to
income, sales, gross receipts, premiums, wages, capital expenditures or
expenses, be deemed to be the amount of such Taxes for the entire Tax period multiplied
by a fraction the numerator of which is the number of days in the Tax period
ending on and including the Closing Date and the denominator of which is the
number of days in the entire Tax period, and (ii) in the case of any Tax based
upon or related to income, sales, gross receipts, premiums, wages, capital
expenditures or expenses, be computed on an interim closing of the books basis
as if the relevant Tax period ended on and included the Closing Date.


 


(c)                                  Subject to paragraph (d) below, any payment required to be made by
Seller pursuant to this Section 5.01 shall be made (i) if reflected on a
Tax Return filed by, or at the direction of, Purchaser pursuant to
Section 5.02(a) or prepared and filed by, or at the direction of,
Purchaser pursuant to Section 5.02(b), within 10 days prior to the due
date for the filing of such Tax Returns and (ii) in all other cases, not later
than 10 days after receipt by Seller of written notice from Purchaser stating
(1) that a Tax Loss has been paid by or reflected on a Tax Return filed by
Purchaser, any of its Affiliates or, effective upon the Closing, AIIHC or any
Subsidiary and (2) the amount of the indemnity payment requested.


 


(d)                                 Except
as otherwise provided in this Section 5.01(d), if any notice of
deficiency, proposed adjustment, adjustment, assessment, audit, examination or
other administrative or court proceeding, suit, dispute or other claim (a “Tax Claim”) is delivered, sent, commenced
or initiated against Purchaser, any of its Affiliates or, effective upon the
Closing, AIIHC or any Subsidiary by any taxing authority, Purchaser shall be
solely responsible for controlling the defense of such Tax Claim.  If any Tax Claim is asserted in writing
against Purchaser, any of its Affiliates or, effective upon the Closing, AIIHC
or any Subsidiary, in respect of which indemnity may be sought from Seller pursuant
to this Section 5.01, Purchaser shall promptly notify Seller of such Tax
Claim within 15 days of Purchaser’s receipt of written notice of such Tax Claim
and shall give Seller such information with respect thereto as Seller may reasonably
request.  Seller may discharge, at any
time, its indemnification obligation under this Section 5.01 by paying to
Purchaser the amount of the applicable Tax Losses, calculated on the date of
such payment. Seller may, at its own expense, participate in and, upon timely
written notice to Purchaser, assume the defense of any such claim, suit, action,
litigation or proceeding (including any Tax audit); provided, however, that, notwithstanding anything to the contrary
set forth herein, (i) Seller shall keep Purchaser fully informed of any
proceedings, events and developments related to or in connection with such Tax
Claim; (ii) Purchaser shall be entitled to receive copies of all correspondence
and documents related to such Tax Claim; (iii) Seller shall consult with
Purchaser and shall not enter into any settlement with respect to any such Tax
Claim without Purchaser’s prior written consent, which shall not be unreasonably
withheld; (iv) at its own cost and expense, Purchaser shall have the right to
participate in (but not control) the defense of such Tax Claim.  Purchaser and its Affiliates (including
AIIHC and any Subsidiary after the Closing) agree to cooperate with Seller in
pursuing any Tax Claim.  Whether or not
Seller chooses to defend or prosecute any Tax Claim, all of the parties hereto
shall cooperate in the defense or prosecution thereof.  Notwithstanding any other provision of this
Agreement, Seller shall not have the right to control, defend, settle,
compromise or contest any Tax Claim to the extent that Purchaser and its
Affiliates waive their right to indemnification from Seller with respect to
such Tax Claim.


 


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SECTION 5.02                    Return
Filings and Payment of Taxes.


 


(a)                                  Seller shall prepare, or caused to be prepared, and Purchaser shall
file, or cause to be filed, on a timely basis, all Tax Returns with respect to
AIIHC and each of the Subsidiaries for all taxable periods ending on or prior
to the Closing Date that are filed after the Closing Date.  Purchaser shall cause AIIHC or the
appropriate Subsidiary to pay all Taxes shown to be due and payable on such Tax
Returns.


 


(b)                                 Purchaser
shall prepare, or cause to be prepared, and file or cause to be filed, on a
timely basis, all Tax Returns with respect to AIIHC and each of the Subsidiaries
for all (i) taxable periods beginning before and ending after the Closing Date
and (ii) taxable periods beginning after the Closing Date, and Purchaser shall
be responsible for remitting all Taxes reflected on such Tax Returns to the
appropriate taxing authorities, subject to indemnification and reimbursement
therefor to the extent provided in Section 5.01.  Purchaser shall permit Seller to review and comment on each Tax
Return described in (i) above prior to filing.


 


SECTION 5.03                    Assistance
and Cooperation.  After the Closing, each of Purchaser and
Seller shall (a) furnish or cause to be furnished to the other upon request, as
promptly as practicable, such information (including access to books and
records) and assistance relating to AIIHC and the Subsidiaries as is reasonably
necessary for the preparation and filing of any Tax Return, the preparation of
any Tax audit and the prosecution or defense of any claim, suit or proceeding
relating to any proposed Tax adjustment of AIIHC or any Subsidiary, (b) make
available to any taxing authority as reasonably requested all information and
documents relating to Taxes of AIIHC or of any of the Subsidiaries, (c) provide
timely notice to the other in writing of any pending or threatened Tax Claim
with respect to AIIHC or of any of the Subsidiaries for any taxable period for
which the other party may have liability under this Article V and (d) furnish
the other with copies of all correspondence received from any taxing authority
in connection with any Tax Claim with respect to any taxable period for which
the other may have liability under this Article V.


 


SECTION 5.04                    Transfer
Taxes.  All transfer, documentary,
sales, use, stamp, registration and other such Taxes and fees (including any
penalties and interest) incurred in connection with this Agreement (“Transfer Taxes”) shall be paid by Seller when due, and
Seller shall file all necessary Tax Returns and other documentation with
respect to all such Transfer Taxes and, if required by applicable law;
Purchaser will, and will cause its Affiliates to, join in the execution of any
such Tax Returns and other documentation.


 


SECTION 5.05                    Characterization
of Indemnification Payments.  All
amounts paid by Seller to Purchaser or its Affiliates or by Purchaser to Seller
or its Affiliates pursuant to this Article V or Article VI shall be
treated as adjustments to the Purchase Price for all Tax purposes.


 


SECTION 5.06                    Survival of
Tax Claims.  Notwithstanding any other
provision of this Agreement to the contrary, any obligations of the parties
pursuant to this Article V shall survive until sixty (60) days after the
expiration of the applicable statute of limitations (taking into account any
applicable extensions or tollings thereof) relating to the Taxes at issue.


 


32

















 


SECTION 5.07                    Exclusive
Remedy.  Notwithstanding any other
provision of this Agreement to the contrary, the provisions of this
Article V shall be the exclusive means by which any party may recover Tax
Losses from any other party with respect to any claim related thereto.


 


SECTION 5.08                    Non-USRPHC
Certification.  Seller shall
furnish, or cause to be furnished to Purchaser, a certification in accordance
with Section 1445 of the Code and the Treasury regulations promulgated
thereunder that none of AIIHC or any of the Subsidiaries is a USRPHC within the
meaning of Section 897 of the Code nor has been a USRPHC at any time
during the 5-year period ending on the Closing Date.


 


ARTICLE VI


 


INDEMNIFICATION


 


SECTION 6.01                    From and after
the Closing, except with respect to Tax Losses (which will be governed
exclusively by the provisions set forth in Article V), and subject to the
terms and conditions of this Article VI, Arch Parent and Seller shall be  liable to, and shall indemnify, protect,
defend and hold harmless Purchaser and its Affiliates and their respective
successors (such persons are hereinafter collectively referred to as the “Purchaser Indemnified Parties”) against any and all claims,
losses, damages, liabilities, assessments, settlements, costs and expenses
(including reasonable attorneys’ fees and expenses) (collectively, the “Damages”) sustained by any Purchaser
Indemnified Party, (i) resulting from or arising out of the breach of any
representation, warranty or covenant made by Arch Parent or Seller in this
Agreement, such breaches being hereinafter referred to collectively as “Indemnifiable Breaches,” (ii) in connection
with or as a result of the case captioned Lewis Small, et al. v. Arch Capital
Group, Ltd. [sic], et al., 03 Civ. 5604 (JFK) pending in the United States
District Court for the Southern District of New York, or any other litigation
arising out of all or some of the same facts or allegations as relate to that
litigation, (iii) (A) in connection with or as a result of the counterclaims in
the case captioned American Independent Insurance Company, et al. v. Charles M.
Lederman, et al., Civil Action No. 97-4153, pending in the United States District
Court for the Eastern District of Pennsylvania, or any other litigation arising
out of all or some of the same facts or allegations as relate to that
litigation, (B) the matters set forth in Item 36 of Schedule 2.08, (C)
Items 3 and 4 of Schedule 2.11(a) and (D) item 1, the matter titled “Lewis
Small” in item 2 and all matters set forth in item 3 other than that matter
titled “Jeanne Liggons”, as all such matters in this clause (D) are set forth
in Schedule 6.11 of the Reorganization Agreement (as hereinafter defined),
(iv) any payment made with respect to the Surplus Notes (as defined in
Schedule 2.08), whether as a result of rescission, reformation,
settlement, adjudication or otherwise, it being agreed that indemnification
with respect thereto shall mean the replacement of one or more Surplus Notes by
Seller with substantially similar instruments or the identical cash amount of
the applicable Surplus Note(s), at the option of Arch Parent or Seller, or (v)
in connection with or as a result of any legal proceeding or any other action
brought by the Third Party in connection with the transactions contemplated by
this Agreement; provided, however, that in no event will the aggregate liability of
Arch Parent and Seller under clause (i) of this Section 6.01 exceed
seventy-five percent (75%) of the Purchase Price (the “Cap”), and provided,
further, that no claims for
indemnification can be made against Arch Parent and Seller under clause (i) of
this Section 6.01 unless and until the aggregate amount of such


 


33

















 


Damages for
which the Purchaser Indemnified Parties are entitled to indemnity under the
terms hereof exceeds $800,000 (the “Basket”).  In the event the aggregate amount of the
Damages sustained by the Purchaser Indemnified Parties in respect of
Indemnifiable Breaches under clause (i) under this Section 6.01 exceeds
the Basket, the indemnification obligations of Arch Parent and Seller shall
apply only to those Damages in respect of Indemnifiable Breaches actually
sustained by the Purchaser Indemnified Parties in excess of the Basket.  Notwithstanding the foregoing, neither the
Basket nor the Cap shall apply to Damages resulting from breaches by Seller
with respect to the representations and warranties set forth in Sections 2.03
and 2.04 of this Agreement, for all of which Damages Seller shall be liable
whether or not the Basket has been satisfied. 
For the avoidance of doubt, neither the Basket nor the Cap shall apply
to Damages for which Purchaser Indemnified Parties are entitled to
indemnification under clauses (ii), (iii), (iv) or (v) of this
Section 6.01.


 


SECTION 6.02                    From and after
the Closing, except with respect to Tax Losses (which will be governed
exclusively by the provisions set forth in Article V), and subject to the
terms and conditions of this Article VI, Purchaser shall be  liable to, and shall indemnify, protect,
defend and hold harmless Seller and its Affiliates and their respective
successors (such persons are hereinafter collectively referred to as the “Seller Indemnified Parties”) against any and all Damages
sustained by any Seller Indemnified Party, resulting from or arising out of the
breach of any representation, warranty or covenant made by Purchaser in this
Agreement, such breaches being hereinafter referred to collectively as “Seller Indemnifiable Breaches”; provided, however,
that in no event will the aggregate liability of Purchaser under this
Section 6.02 exceed seventy-five percent (75%) of the Purchase Price (the
“Seller Cap”), and provided, further, that no claims for
indemnification can be made against Purchaser hereunder unless and until the
aggregate amount of such Damages for which the Seller Indemnified Parties are
entitled to indemnity under the terms hereof exceeds $800,000 (the “Seller Basket”).  In the event the aggregate amount of the Damages sustained by the
Seller Indemnified Parties in respect of Seller Indemnifiable Breaches
hereunder exceeds the Seller Basket, the indemnification obligations of Purchaser
shall apply only to those Damages in respect of Seller Indemnifiable Breaches
actually sustained by the Seller Indemnified Parties in excess of the Seller
Basket.  Notwithstanding the foregoing,
neither the Seller Basket nor the Seller Cap shall apply to Damages resulting from
breaches by Seller with respect to the representations and warranties set forth
in Section 3.03 of this Agreement, for all of which Damages Purchaser
shall be liable whether or not the Seller Basket has been satisfied.


 


SECTION 6.03                    Promptly after
any party hereto has received notice or has knowledge of any claim or the
commencement of any action or proceeding for which such party may be entitled
to indemnification hereunder (hereinafter the “Indemnified Party”), the Indemnified Party shall, if a claim
with respect thereto is indemnifiable by the other party pursuant to the terms
hereof (hereinafter the “Indemnifying Party”),
give the Indemnifying Party written notice of such claim or the commencement of
such action or proceeding and provide the Indemnifying Party with all relevant
information respecting such claims which is in the possession of the
Indemnified Party.  Such notice shall
state the nature and basis of such claim and, if ascertainable, the amount thereof.  In each such case, the Indemnified Party
agrees to give such notice to the Indemnifying Party promptly following its
receipt of notice or other knowledge of any such claim, action or proceeding; provided, however, that the failure of the Indemnified Party to give
such notice shall not excuse the Indemnifying Party’s obligation to


 


34

















 


indemnify
except to the extent the Indemnifying Party has suffered damage or prejudice by
reason of the Indemnified Party’s failure to give or delay in giving such
notice.  If such notice concerns a claim
of a third person, the Indemnifying Party may elect, at such party’s sole
expense, to assume exclusive control of the defense, settlement, adjustment or
compromise of any such claim, with counsel reasonably acceptable to the
Indemnified Party, it being understood that with respect to the matter
described in clause (ii) of Section 6.01, the counsel set forth on Schedule 6.03 is deemed approved by Purchaser.  The Indemnifying Party may enter into any
settlement, adjustment or compromise of any such claim without the prior
written consent of the Indemnified Party if such settlement, adjustment or
compromise involves a remedy or remedies for money damages and the Indemnifying
Party obtains a written release of the Indemnified Party from such third
person.  The Indemnifying Party shall
obtain the prior written consent of the Indemnified Party (which consent shall
not be unreasonably withheld, conditioned or delayed) before entering into any
settlement, adjustment or compromise that would involve a remedy or remedies
other than the payment of money damages by the Indemnifying Party.  In the event the Indemnifying Party has
elected not to assume the control of the defense, settlement, adjustment or
compromise of any third person claim or if the Indemnifying Party shall have
failed, after the lapse of a reasonable period of time, which shall in no event
be less than thirty (30) calendar days after receipt of written notice of such
third person claim, to assume the control of the defense, settlement,
adjustment or compromise of such claim, the Indemnified Party shall be entitled
to defend against the same and to employ counsel reasonably satisfactory to the
Indemnifying Party, at the expense of the Indemnifying Party; provided, however,
in such event, the Indemnified Party shall obtain the prior written consent of
the Indemnifying Party (which consent shall not be unreasonably withheld,
conditioned or delayed) before entering into any settlement, adjustment or
compromise of any such claim. At any time after receipt of notice of any third
person claim, the Indemnifying Party may request the Indemnified Party to agree
in writing to the payment or compromise of the third person claim (provided
such payment or compromise has been previously approved in writing by the third
party claimant), whereupon such action shall be deemed agreed to by the
Indemnified Party and shall be agreed to in writing by the Indemnified Party
unless such settlement would involve a remedy or remedies other than the
payment of money damages by the Indemnifying Party.  In connection with any third person claim, the Indemnified Party,
or the Indemnifying Party, if it has assumed the defense of such claim pursuant
hereto, shall diligently pursue the defense of such third person claim and the
parties shall cooperate with one another in connection with the handling of
such claim, shall make available personnel, witnesses, books and records
relevant thereto and grant such authorizations as are necessary and reasonable
to their respective agents, representatives and counsel upon reasonable
request.


 


SECTION 6.04                    The terms of
this Article VI are intended to benefit the parties hereto, and shall
survive the Closing until the date that is forty five (45) days following the
date of delivery of the annual financial statements of PSIC and American
Independent Insurance for the year ended December 31, 2005 to the
applicable state insurance department (the “Survival
Date”); provided,
however, that (i) any
written claims for indemnification made on or prior to such expiration date
shall survive the Closing until final resolution thereof, (ii) any claims for
indemnification relating to the matters set forth in Sections 2.03 and 2.04
hereof shall survive the Closing indefinitely, (iii) any claims for
indemnification relating to matters set forth in Section 2.09 shall
survive until December 31, 2007, (iv) any claims for indemnification
relating to matters set forth in Section 2.10 shall survive as if governed
by Section 5.06 hereof, (v) any


 


35

















 


claims for
indemnification under clauses (ii), (iii) or (iv) of Section 6.01 hereof
shall survive the Closing until the final disposition of the litigation
referred to therein and (vi) any claims for indemnification under clause (v) of
Section 6.01 hereof shall survive the Closing until the expiration of any
applicable statute of limitations.


 


SECTION 6.05                    With respect
to the determination of Damages under Article V or Article VI, no
Damages shall be deemed to have been sustained by the Indemnified Party and any
payment otherwise payable by an Indemnifying Party pursuant to the terms hereof
shall be limited to the amount of any Damages that remain after deducting
therefrom (i) any proceeds actually received by the Indemnified Party from any
insurance policies with respect thereto, and (ii) any proceeds actually
received from another responsible person. 
In addition, if any Indemnified Party recognizes a Tax Benefit (as
defined below) as a result of any Damages sustained by such Indemnified Party
with respect to which any claim is made under Article V or Article VI
(an “Indemnity Claim”), the Indemnifying
Party shall be entitled to such Tax Benefit and the Indemnified Party shall pay
to the Indemnifying Party the amount of such Tax Benefit (but not in excess of
the indemnification payment or payments actually received from the Indemnifying
Party with respect to such Damages) at such time or times as and to the extent
that the Indemnified Party actually realizes such Tax Benefit through a refund
of Tax or reduction in the actual amount of Taxes which the Indemnified Party
would otherwise have had to pay if such payment for Damages had not been made; provided, however,
that any such Tax Benefit shall be reduced by the amount of Tax detriment
(including the tax effect of any item of income or gain or other item,
including any decrease in Tax basis, which increases any amounts paid with
respect to Taxes, any reduction in the amount of any refund of Tax which would
otherwise have been available, the utilization of any net operating loss or
capital loss or the utilization of any Tax credits or other Tax attributes) the
Indemnified Party suffered as a result of any Damages; and, provided  further,
that the amount of any such Tax detriment shall be taken into account (but not
in excess of any such Tax Benefit) at such time or times as and to the extent
that the Indemnified Party actually suffers such Tax detriment through an
actual payment of Tax or reduction in the amount received as Tax refund, in all
events computed on the same basis as the Tax Benefit.  For the purposes of this Agreement, any realized Tax Benefit
shall be treated as though it were a reduction in the amount of the initial
Indemnity Claim, and the liabilities of the parties shall be redetermined as
though both occurred at or prior to the time of the indemnity payment. 
For purposes of this Section 6.05, a “Tax Benefit”
means an amount by which the Tax liability of the Indemnified Party is reduced (including,
without limitation, by deduction, reduction of income by virtue of increased
Tax basis or otherwise, receipt of refund, credit or otherwise) plus any
related interest received from the relevant taxing authority.  Where a
party has other losses, deductions, credits or items available to it, the Tax
Benefit from any losses, deductions, credits or items relating to the Indemnity
Claim shall be deemed to be realized proportionately with any other losses,
deductions, credits or items.  In the event that there should be a
determination disallowing the Tax Benefit, the Indemnifying Party shall be
liable to refund to the Indemnified Party the amount of any related reduction
previously allowed or payments previously made to the Indemnifying Party pursuant
to this Section 6.05.  The amount of the refunded reduction or
payment shall be deemed a payment under this Section 6.05 and thus shall
be paid subject to any applicable reductions under this Section 6.05.


 


SECTION 6.06                    Purchaser, on
the one hand, and Arch Parent and Seller, on the other hand, each hereby
acknowledges and agrees that (except in the case of fraud, in which case


 


36

















 


each such
person reserves any and all rights and remedies available to it) its sole and
exclusive remedy with respect to any and all claims relating to the subject
matter of this Agreement and the transactions contemplated hereby (but, for the
avoidance of doubt, not including Tax Losses, which will be governed
exclusively by the provisions set forth in Article V) shall be pursuant to
the indemnification provisions set forth in this Article VI, except that
the parties shall not be limited to the remedies provided in this
Article VI with respect to any disputes pursuant to the Reinsurance
Agreements or any other reinsurance arrangements between AIIHC or any
Subsidiary, on the one hand, and Seller or any of its Affiliates, on the other
hand.  In furtherance of the foregoing,
Purchaser and Seller each hereby waive, to the fullest extent permitted under
applicable law, any and all rights, claims and causes of action it may have
against any other party hereto or any of its Affiliates, arising under or based
upon any law (including, without limitation, any such rights, claims or causes
of action arising under or based upon common law or otherwise) with respect to
any and all claims relating to the subject matter of this Agreement and the
transactions contemplated hereby, except as set forth in the preceding
sentence.  In addition, notwithstanding
anything in this Agreement to the contrary, no party shall be liable to any
other party for special, indirect, incidental, consequential damages or lost
profits, whether in contract, warranty, negligence, tort, strict liability or
otherwise, arising out of this Agreement or the transactions contemplated
hereby.  If any party hereto has
knowledge of any claim for which such party may be entitled to indemnification
hereunder (assuming closing of the transactions contemplated by this Agreement)
(a “Prospective Indemnified
Party”) such party shall give the other party (a “Prospective Indemnifying Party”) prompt written notice of
such claim and provide the Prospective Indemnifying Party with all relevant
information with respect to such claim which is in the possession of such
party; provided, however, that the failure of the Prospective
Indemnified Party to give such notice shall not excuse the Prospective
Indemnifying Party’s obligation to indemnify except to the extent the
Prospective Indemnifying Party has suffered damage or prejudice by reason of
the Prospective Indemnified Party’s failure to give or delay in giving such
notice.


 


ARTICLE VII


 


TERMINATION
AND ABANDONMENT.


 


SECTION 7.01                    This Agreement
may be terminated and the transactions contemplated hereby may be abandoned at
any time prior to the Closing Date:


 


(a)                                  by
the mutual written consent of Purchaser and Seller


 


(b)                                 by
Purchaser, in writing, if Arch Parent or Seller shall have (i) failed to
perform in any material respect their agreements contained herein required to
be performed by them on or prior to the Closing Date, or (ii) materially
breached any of their representations or warranties contained herein, which
failure or breach is not cured within twenty (20) days after Purchaser notifies
Arch Parent or Seller of its intent to terminate this Agreement pursuant to
this subsection (b) of Section 7.01;


 


(c)                                  by
Seller, in writing, if Purchaser shall have (i) failed to perform in any
material respect its agreements contained herein required to be performed by it
on or prior to the Closing Date, or (ii) materially breached any of its
representations or warranties contained


 


37

















 


herein, which
failure or breach is not cured within twenty (20) days after Seller notifies
Purchaser of its intent to terminate this Agreement pursuant to this
subsection (c) of Section 7.01;


 


(d)                                 by
Purchaser, in writing, at any time on or prior to June 14, 2004 (the “Due Diligence End Date”), if Purchaser notifies Seller in
writing that the results of its due diligence investigation are unsatisfactory
to Purchaser; provided, that,
Purchaser may deliver to Seller, not later than the Due Diligence End Date,
written notice enumerating any matters reasonably acceptable to Seller with respect
to which Purchaser requires additional due diligence, in which case, with
respect to such matters only, the Due Diligence End Date shall be June 24,
2004.


 


(e)                                  by
Seller or Purchaser, in writing, if the Closing has not occurred on or before
September 30, 2004; provided, that the right to terminate this Agreement
under this Section 7.01(e) shall not be available to any party whose
failure, or whose Affiliate’s failure, to fulfill any obligation under this
Agreement shall have been the cause of, or shall have resulted in, the failure
of such conditions to have been complied with, performed or satisfied prior to
such date; and provided, further, that such date may be
extended, in the sole discretion of either Seller or Purchaser, to
November 1, 2004, if the sole condition to Closing that is not yet capable
of being satisfied is the approval of any state insurance regulatory body;


 


(f)                                    by
Purchaser or Seller, in writing, if there shall be any order writ, injunction
or decree of any court or government entity binding on Arch Parent, Seller or
Purchaser which prohibits or restrains Arch Parent, Seller or Purchaser from
consummating the transactions contemplated hereby; provided,
however, that the party seeking termination under this
Section 7.01(f) shall have used its reasonable best efforts, and its
applicable Affiliates shall have used their reasonable best efforts, to have
any such order, writ, injunction or decree lifted; and


 


(g)                                 by
Arch Parent or Seller at any time on or prior to the Due Diligence End Date, if
Arch Parent or Seller has a reasonable basis to believe that Purchaser is
seeking to materially modify the Agreement and either Arch Parent or Seller has
not obtained the approval of its respective Board of Directors for such
modified agreement.


 


SECTION 7.02                    If this
Agreement is terminated in accordance with Section 7.01 hereof, this
Agreement shall become null and void and have no further force and effect, and
no party hereto shall have any liability to any other party hereto or its
respective shareholders, members or directors, officers, managers or other
Affiliates in respect thereof, except that the obligations set forth in the
confidentiality agreement, dated as of March 31, 2004 (the “Confidentiality Agreement”), executed by AIIHC and Wand Partners,
Inc., an affiliate of Purchaser, and in Article X hereof shall survive any
such termination; provided, however, that nothing herein shall
relieve any party from liability for the breach of this Agreement.


 


38

















 


ARTICLE VIII


 


CONDITIONS
PRECEDENT TO THE OBLIGATIONS OF PURCHASER


 


The obligations of Purchaser to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment of each of
the following conditions, except to the extent any such conditions are
expressly waived in writing by Purchaser at or prior to the Closing.


 


SECTION 8.01                    Accuracy of
Representations and Warranties.  The
representations and warranties made by Arch Parent and Seller in this Agreement
shall be true and correct in all material respects (except that representations
and warranties qualified by materiality or Material Adverse Effect shall be
true and correct in all respects) on and as of the date of this Agreement and
(except to the extent such representations refer to an earlier date) on and as
of the Closing Date as if made on and as of the Closing Date.


 


SECTION 8.02                    Covenants
Performed.  Arch Parent and Seller
shall have performed and complied in all material respects with all covenants
and agreements required by the Agreement to be performed or complied with by
Arch Parent and Seller on or prior to the Closing Date.


 


SECTION 8.03                    Certificates
Delivered.  At the Closing, Arch
Parent and Seller shall have delivered to Purchaser certificates representing
the AIIHC Common Shares, duly endorsed for transfer or together with duly
executed stock powers (with, if applicable, all appropriate stock transfer tax
stamps affixed), free and clear of all Liens (other than Liens arising under
applicable federal and state securities laws).


 


SECTION 8.04                    No Adverse
Proceeding.  As of the Closing Date,
there shall not have been instituted or be pending or threatened any suit,
action or other proceeding by any governmental agency or any other person in
which it is sought to restrain or prohibit, or question the validity or
legality of, or make materially more costly to Purchaser, the transactions
contemplated by this Agreement or seeking to obtain material damages in
connection with such transactions.


 


SECTION 8.05                    Corporate
Records Delivered.  Seller shall
have delivered to Purchaser the corporate minute books of AIIHC and each
Subsidiary and the certificates representing the Subsidiary Shares.


 


SECTION 8.06                    Required
Consents.  The approvals and
consents listed on Schedule 2.06 hereto
shall have been obtained without any conditions, restrictions or limitations
materially adverse to Purchaser or the interests of Purchaser.


 


SECTION 8.07                    Contributions
and Redemption.  The Contributions
and the Redemption shall have been completed on the terms set forth in this
Agreement or otherwise satisfactory to Purchaser.


 


SECTION 8.08                    Material
Adverse Effect.  From the date of
this Agreement, there shall not have occurred any Material Adverse Effect, nor
shall any event or events have occurred


 


39

















 


that,
individually or in the aggregate, with or without the lapse of time, may cause
or create any Material Adverse Effect.


 


SECTION 8.09                    Additional
Documents.  Purchaser shall have
received:


 


(a)                                  A
certificate signed by an officer of Seller, dated as of the Closing Date, as to
the matters set forth in Sections 8.01 and 8.02 and the charter documents of
each of AIIHC and the Subsidiaries attached to such certificate and (ii) the
following certificates: (1) Certificates of Good Standing for each of AIIHC and
the Subsidiaries dated on or within one (1) business day of the Closing Date;
and (2) Certificates of Authority for American Independent Insurance or PSIC
dated on or within (1) business day of the Closing Date from the Insurance
Departments of each of Pennsylvania and Ohio, respectively.


 


(b)                                 Certificates
of secretaries or assistant secretaries or another officer, dated the Closing
Date, setting forth the resolutions of the Boards of Directors of Arch Parent
and Seller approving and authorizing the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby,
and certifying that such resolutions have not been amended or rescinded and are
in full force and effect;


 


(c)                                  A
receipt evidencing receipt of the Purchase Price;


 


(d)                                 The
certificate to be provided pursuant to Section 5.08 of this Agreement.


 


(e)                                  Duly
executed copies of the Reinsurance Agreements;


 


(f)                                    Resignations
of all directors of AIIHC and each Subsidiary, as requested by Purchaser at
least ten (10) business days prior to the Closing Date.


 


SECTION 8.10                    Third Party
Agreement.  The Third Party
Agreement shall have been terminated pursuant to the terms thereof.


 


ARTICLE IX


 


CONDITIONS
PRECEDENT TO THE OBLIGATIONS OF 

ARCH PARENT AND THE SELLER


 


The obligations of Arch Parent and Seller to consummate the
transactions contemplated by this Agreement shall be subject to the fulfillment
of each of the following conditions, except to the extent any such conditions
are expressly waived in writing by Arch Parent and Seller at or prior to the
Closing.


 


SECTION 9.01                    Accuracy of
Representations and Warranties.  The
representations and warranties made by Purchaser in this Agreement shall be
true and correct in all material respects (except that representations and
warranties qualified by materiality shall be true and correct in all respects)
on and as of the date of this Agreement and (except to the extent such
representations refer to an earlier date) on and as of the Closing Date.


 


40

















 


SECTION 9.02                    Covenants
Performed.  Purchaser shall have
performed and complied in all material respects with all covenants and
agreements required by this Agreement to be performed or complied with by
Purchaser on or prior to the Closing Date.


 


SECTION 9.03                    Purchase
Price.  At the Closing, Purchaser
shall have paid the Purchase Price as required pursuant to Section 1.03
above.


 


SECTION 9.04                    Officer’s
Certificate.  Purchaser shall have
delivered to Seller a certificate signed by an officer of Purchaser, dated as
of the Closing Date, as to the matters set forth in Sections 9.01 and 9.02.


 


SECTION 9.05                    Secretary’s
Certificate.  Purchaser shall have
delivered to Seller a certificate of the secretary or assistant secretary,
dated the Closing Date, setting forth the resolutions of the Board of Directors
of Purchaser approving and authorizing the execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby,
and certifying that such resolutions have not been amended or rescinded and are
in full force and effect.


 


SECTION 9.06                    No Adverse
Proceeding.  As of the Closing Date,
there shall not have been instituted or be pending or threatened any suit,
action or other proceeding by any governmental agency or any other person in
which it is sought to restrain or prohibit, or question the validity or
legality of the transactions contemplated by this Agreement or seeking to
obtain material damages in connection with such transactions.


 


SECTION 9.07                    Required
Consents.  The approvals and
consents listed on Schedule 2.06 hereto
shall have been obtained.


 


SECTION 9.08                    Reinsurance
Agreements.  Seller shall have
received duly executed Reinsurance Agreements.


 


SECTION 9.09                    Certificate.  Seller shall have received a receipt
acknowledging Purchaser’s receipt of the certificates referenced in
Section 8.03.


 


ARTICLE X


 


ADDITIONAL
AGREEMENTS AND PROVISIONS


 


SECTION 10.01              Survival of
Certain Representations and Warranties. 
The representations and warranties in this Agreement shall survive the
Closing until the Survival Date; provided,
however, that (a) the
representations and warranties set forth in Section 2.03 and 2.04 shall
survive the Closing indefinitely, (b) the representations and warranties set
forth in Section 2.10 (relating to Taxes) shall survive the Closing until
the expiration of the applicable statute of limitations (taking into account
any applicable extensions or tollings thereof), (c) the representations and
warranties set forth in Section 2.09 (relating to employee benefit plans)
shall survive the Closing until December 31, 2007 and (d) this
Section 10.01 shall not limit any other covenant or agreement of the
parties that expressly contemplates performances beyond such period.


 


41

















 


SECTION 10.02              Definitions of
Certain Terms.


 


(a)                                  The
term “Material Adverse Effect” or
“Material Adverse Change,” when used in
this Agreement means any event, circumstance or change that  (i) is materially adverse to the assets,
business, results of operation or financial condition of AIIHC and the
Subsidiaries, taken as a whole or (ii) materially adversely affects the ability
of Seller or Arch Parent to perform its obligations hereunder or to consummate
the transactions contemplated hereby; provided, however that the following shall be
excluded from any determination as to whether a Material Adverse Effect or
Material Adverse Change has occurred: (a) any changes or effects attributable
to general economic or political conditions or the securities markets or (b)
any changes or effects that are generally applicable to persons engaged in the
Business, including without limitation, any such changes or effects resulting from
the break-out of war or a terrorist or similar attack.


 


(b)                                  For
purposes of this Agreement, an “Affiliate” of a person means any other person
in control of, controlled by or under common control with such person.  For purposes of this Agreement, the term “control”
(including the terms “controlling,” “controlled by” and “under common
control with”) means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by contract, or
otherwise.


 


(c)                                   The
term “Reorganization Agreement,”
when used in this Agreement, means the Reorganization Agreement, dated as of
December 31, 2000, relating to the acquisition of all of the capital stock
of AIIHC by Arch Parent.


 


(d)                                  The
term “Person,” when used in this
Agreement, means any individual, corporation, limited liability company,
partnership, limited partnership, firm, joint venture, association, joint-stock
company, trust, unincorporated organization, governmental, judicial or
regulatory body or other entity.


 


SECTION 10.03              Fees and Expenses.


 


(a)                                  Purchaser,
on the one hand, and Arch Parent and Seller, on the other hand, hereby agree
that they will each be responsible for their own costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby, and
that Arch Parent and Seller will be responsible for the costs and expenses of
AIIHC and the Subsidiaries incurred in connection with this Agreement and the
transactions contemplated hereby prior to the Closing Date, including in each
instance, without limitation, all costs of brokers, advisors, consultants,
legal counsel, accountants, appraisers, employees and any other individuals,
related, directly or indirectly, to the transactions contemplated hereby.


 


(b)                                 Arch
Parent and Seller, on the one hand, and Purchaser, on the other hand, shall
indemnify the other and hold it or them, as the case may be, harmless from and
against any claims for advisor’s fees, finders’ fees or brokerage commissions,
in relation to or in connection with the transactions contemplated by this
Agreement as a result of any agreement or understanding between Arch Parent,
AIIHC or Seller, on the one hand, or Purchaser, on the other hand, and any third
party.


 


42

















 


SECTION 10.04              Publicity.  Arch Parent and Seller, on the one hand, and
Purchaser, on the other hand, agree that, prior to the Closing, neither they
nor any of their Affiliates or agents or representatives shall issue any press
release or make any other public announcement or disclosure concerning this
Agreement or the transactions contemplated hereby without the prior consent of
the other party, provided that Arch Parent, Seller, Purchaser and/or their
respective Affiliates may make or direct their agents or representatives to
make such public announcements or disclosures that they believe in good faith
based upon the advice of counsel to be required by applicable laws, rules and
regulations, in which case Arch Parent, Seller, Purchaser or the Affiliate
making or directing that the required announcement or disclosure be made shall
inform the other party as to the timing and contents of such announcement or
disclosure prior to making such announcement or disclosure and shall provide
such party with a reasonable opportunity to review and comment upon any such
required announcement or disclosure.


 


SECTION 10.05              Consent to
Jurisdiction; Waiver of Jury Trial.


 


(a)                                  For
the purpose of any action that may be brought in connection with this
Agreement, Purchaser, Arch Parent and Seller hereby consent to the jurisdiction
and venue of the United States District Court for the Southern District of New
York or of the Supreme Court of the State of New York, County of New York.  Purchaser, Arch Parent and Seller hereby
waive the right to contest the jurisdiction and venue of any of said courts on
the ground of inconvenience or otherwise. 
The provisions of this Section shall not limit or otherwise affect
the right of either party to institute and conduct an action in any other
appropriate manner, jurisdiction or court.


 


(b)                                  NEITHER
PURCHASER, ARCH PARENT NOR SELLER, NOR ANY ASSIGNEE OR SUCCESSOR OF ANY OF THEM
SHALL SEEK A JURY TRIAL IN ANY PROCEEDING BASED UPON
OR ARISING OUT OF THIS AGREEMENT, OR ANY OTHER DOCUMENT OR AGREEMENT EXECUTED
PURSUANT HERETO OR IN CONNECTION HEREWITH. 
NO SUCH PERSON WILL SEEK TO CONSOLIDATE ANY SUCH ACTION INTO ONE IN
WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.  EACH PARTY HERETO (i) CERTIFIES THAT NO REPRESENTATIVE,
AGENT OR ATTORNEY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT ANY PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND
(ii) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT
AND EACH OTHER DOCUMENT OR AGREEMENT EXECUTED IN CONNECTION HEREWITH, AS
APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS
HEREIN.  THE PROVISIONS OF THIS
SECTION HAVE BEEN FULLY DISCLOSED BY AND TO THE PARTIES HERETO AND THE
PROVISIONS HEREOF SHALL BE SUBJECT TO NO EXCEPTIONS.  NO PARTY HERETO HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY
OTHER PARTY HERETO THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY
ENFORCED IN ALL INSTANCES.


 


SECTION 10.06              Execution in
Counterparts.  For the convenience
of the parties, this Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.


 


43

















 


SECTION 10.07              Notices.  All notices that are required or may be
given pursuant to the terms of this Agreement shall be in writing and delivered
by hand or national overnight courier service or sent by facsimile transmission
(and immediately after transmission receipt of which has been confirmed by
telephone by sender), as follows:


 


If to Purchaser, to:


 


Protective Underwriting Services, Inc.


c/o Wand Partners, Inc.


630 Fifth Avenue


Suite 2435


New York, NY 10111


Tel No.:  (212) 632-3795


Fax No.: (212) 307-5599


Attention: Bruce W. Schnitzer


 


With a copy to:


Skadden, Arps, Slate, Meagher & Flom LLP


1440 New York Avenue, NW


Washington, DC 20005


Attention: Marc Gerber, Esq.


Tel No.:  (202) 371-7000


Fax No.:  (202) 393-5760


 


If to the Seller and/or Arch Parent:


 


To Seller:


 


Wessex House

45 Reid Street

Hamilton, HM 12, Bermuda

Tel No.: (441) 278-9250


Fax No.: 
(441) 278-9255

Attention: President


 


To Arch Parent:


 


Wessex House

45 Reid Street

Hamilton, HM 12, Bermuda


Tel No.:  
(441) 278-9250

Fax No.:  (441) 278-9255

Attention: President


 


or such other address or addresses or facsimile number as any party
hereto shall have designated by notice in writing to the other parties hereto
in accordance with the terms hereof.  A
notice shall be deemed to have been given (a) upon personal delivery, if
delivered by hand or courier or


 


44

















 


(b) the next business day if sent by facsimile transmission (and
immediately after transmission receipt of which has been confirmed by telephone
by sender).


 


SECTION 10.08              Waivers.  Arch Parent and Seller may, by written
notice to Purchaser, and Purchaser may, by written notice to Arch Parent and
Seller: (a) extend the time for the performance of any of the obligations or
other actions of the other under this Agreement; (b) waive any inaccuracies in
the representations or warranties of the other contained in this Agreement or
in any document delivered pursuant to this Agreement; or (c) waive compliance
with any of the covenants and agreements of the other contained in this
Agreement. The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach.


 


SECTION 10.09              Entire Agreement.  This Agreement, the agreements contemplated
herein and in the schedules and exhibits hereto, and in the agreements and
documents executed at the Closing in connection herewith and therewith,
together with the Confidentiality Agreement, constitute the entire agreement
among the parties hereto with respect to the subject matter hereof and thereof
and supersede all prior agreements and understandings, oral and written, among
the parties hereto with respect to the subject matter hereof.  No representation, warranty, promise, inducement
or statement of intention has been made by any party that is not expressly
embodied in this Agreement or such other documents, and none of the parties
shall be bound by, or be liable for, any alleged representation, warranty,
promise, inducement or statement of intention not embodied herein or therein.


 


SECTION 10.10              Applicable Law.  This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the principles of conflict of law thereof.


 


SECTION 10.11              Binding Effect,
Benefits.  This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and permitted assigns. Notwithstanding anything contained
in this Agreement to the contrary, nothing in this Agreement, express or
implied, is intended to confer on any person other than the parties hereto or
their respective successors and permitted assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement.


 


SECTION 10.12              Assignability.  Neither this Agreement nor any of the
parties’ rights or obligations hereunder shall be assignable by any party
hereto without the prior written consent of the other parties hereto, provided,
that Seller may assign its rights and obligations to an Affiliate of Seller in
connection with Seller’s transfer of the AIIHC Common Shares.


 


SECTION 10.13              Amendments.  This Agreement may be modified, amended or
supplemented at any time by Purchaser, and Arch Parent and Seller.  Without limiting the generality of the
foregoing, this Agreement may only be amended, varied or supplemented by an
instrument in writing, signed by the parties hereto.


 


SECTION 10.14              Knowledge.  To the extent that any representation or
warranty of any party hereunder is expressly qualified by reference to the
knowledge of such party, such


 


45

















 


knowledge
shall mean the actual knowledge of one or more of the following persons after
reasonable inquiry.


 


(a)                                  with
respect to the knowledge of Arch Parent, Seller, AIIHC and/or any of  the Subsidiaries:  Constantine Iordanou (for Arch Parent), John D. Vollaro, Peter A.
Appel and Louis T. Petrillo (for Arch Parent and/or Seller) and William B.
Lockhorn, Mark J. Keyser, Bruce Arneson, Joseph Timoney and Joseph King (for
AIIHC and the Subsidiaries); and


 


(b)                                 with
respect to the knowledge of Purchaser: 
Bruce W. Schnitzer and John S. Struck.


 


SECTION 10.15              Disclosure.  The written disclosures by Seller in this
Agreement or in a schedule or exhibit hereto or in any agreement,
certificate or other document executed and delivered pursuant hereto of such
information as is not required under the terms hereof or thereof to be
disclosed herein or therein shall not effect the standards of materiality or
disclosure applicable to this Agreement and the schedules and exhibits hereto
or such other agreement, certificate or other document executed and delivered
pursuant hereto.  Arch Parent and Seller
shall have the right, at any time on or before June 7, 2004, to supplement
or amend the written disclosures by Seller in the schedules attached hereto,
which amended or supplemented schedules shall be deemed to have been disclosed
as of the date of this Agreement.


 


SECTION 10.16              Headings.  The headings in this Agreement are for
reference only, and shall not affect the interpretation of this Agreement.


 


SECTION 10.17              No Third Party
Beneficiaries.  Except as otherwise
expressly set forth in Article IV or in any provision of this Agreement,
nothing in this Agreement is intended or shall be construed to give any person,
other than the parties hereto, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.


 


SECTION 10.18              Specific
Performance.  The parties recognize
and agree that if for any reason any of the provisions of this Agreement are
not performed in accordance with their specific terms or otherwise breached,
immediate and irreparable harm or injury would be caused for which money
damages would not be an adequate remedy. 
Accordingly, each party agrees that, in addition to any other available
remedies, the other party shall be entitled to specific performance of the
terms hereof, in addition to any other remedy at law or equity.  In the event that any action should be
brought in equity to enforce the provisions of this Agreement, no party will
allege, and each party hereby waives the defense, that there is an adequate
remedy at law.


 


46

















 


IN WITNESS WHEREOF,
intending to be legally bound hereby, the parties have executed and delivered
this Stock Purchase Agreement as of the day and year first above written.


 


 


	
   

  	
  PROTECTIVE UNDERWRITING

  SERVICES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ Bruce W.
  Schnitzer

  	
   

  
	
   

  	
  Name: 
  Bruce W. Schnitzer

  	
   

  
	
   

  	
  Title: 
  President

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARCH CAPITAL HOLDINGS LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ John D. Vollaro

  	
   

  
	
   

  	
  Name: 
  John D. Vollaro

  	
   

  
	
   

  	
  Title: 
  Director

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARCH CAPITAL GROUP LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ John D. Vollaro

  	
   

  
	
   

  	
  Name: 
  John D. Vollaro

  	
   

  
	
   

  	
  Title:  Executive Vice President and

  Chief Financial Officer

  	
   

  
						



 

















 


Exhibit
A


 


Investment
Guidelines of PSIC and American Independent Insurance


 

















 


Exhibit
B


 


Current
Reinsurance Agreement


 

















 


AMENDMENT NO. 1 TO THE 

STOCK PURCHASE AGREEMENT


 


AMENDMENT NO. 1 (this “Amendment”), dated as of July 9, 2004,
by and among PROTECTIVE UNDERWRITING SERVICES, INC., a Delaware corporation (“Purchaser”), ARCH CAPITAL HOLDINGS LTD., a
Bermuda company (“Seller”), and
ARCH CAPITAL GROUP LTD., a Bermuda company (“Arch
Parent”).


 


WHEREAS, Purchaser, Seller and Arch Parent
entered into that certain Stock Purchase Agreement (the “Agreement”) dated as of May 13, 2004; and


 


WHEREAS, the parties to the Agreement desire
to amend the Agreement as set forth in this Amendment.


 


NOW, THEREFORE, in consideration of the
mutual covenants and agreements contained herein, the parties, intending to be
legally bound, hereby agree as follows:


 


1.                                       Section 1.02
of the Agreement is amended to read in its entirety as follows:


 


“SECTION 1.02  Purchase
Price.  The purchase price for the
AIIHC Common Shares (the “Purchase Price”)
shall consist of $45,000,000 in cash to Seller.”


 


2.                                       Section 4.07
of the Agreement is amended to read in its entirety as follows:


 


“SECTION 4.07  Consents
and Conditions.


 


(a)  Upon the terms and subject
to the conditions of this Agreement, each of the parties hereto shall
cooperate, and use their respective reasonable best efforts to, make all
filings and agree to use all reasonable best efforts to obtain any required
third party and governmental consents to the transactions contemplated by this
Agreement, and to cause each of the conditions and obligations of Seller and
Purchaser hereunder to be satisfied. 
Consistent with such provision, as soon as reasonably practicable following
the Due Diligence End Date (as defined herein), Purchaser shall complete and
deliver to the Offices of the Delaware, Indiana, Maryland, Ohio and
Pennsylvania Insurance Departments, as applicable, the initial filings of the
Form A relating to Purchaser’s purchase of the AIIHC Common Shares.  Prior to Closing, Purchaser shall respond to
any written inquiry made by any such Office relating to the Form A within five
(5) business days of the receipt of any such written inquiry.


 

















 


(b)  Purchaser, on the one hand,
and Seller, AIIHC and the Subsidiaries, on the other hand, hereby agree to
mutually cooperate during any pre-Closing discussions with ratings agencies
regarding AIIHC and the Subsidiaries which are deemed appropriate and
reasonable by both Seller and Purchaser, including participation in meetings
and providing documents as may be reasonably requested by such ratings
agencies.  In furtherance of the
foregoing, the parties have scheduled a meeting with A. M. Best for
July 14, 2004 (such meeting, and any postponement, adjournment or
continuation thereof, and any follow up proximately related thereto, referred
to herein as the “Best Meeting”).  Purchaser and Seller each agree to cause
their respective representatives, and Seller and Arch Parent agree to cause
representatives of their applicable reinsurance affiliates and representatives
of AIIHC, to attend the Best Meeting. 
In connection with the Best Meeting, the parties agree to mutually
cooperate to develop (i) statutory financial information and analytics for a
presentation to be made at the Best Meeting, including (x) projected income
statements and balance sheets for AIIHC and the Subsidiaries for 2004 and 2005
and (y) estimated Best Capital Adequacy Ratio (BCAR) calculations for 2003 and
2004, and (ii) a business plan for AIIHC and the Subsidiaries, including (v) a
chart of management responsibilities, (w) a presentation of the proposed
capital structure and a description of the sponsors and investors, (x) plans
with regard to dividends and/or other planned reductions of, or additions to,
statutory capital, (y) changes in product strategy, distribution channels or
geographic coverage and (z) growth plans.”


 


3.                                       Section 4.08
of the Agreement is amended by adding the following provisions at the end of
Section 4.08:


 


“(c)  On the Closing Date,
Seller and Arch Parent shall cause the Current Agreement to be amended as set
forth in Exhibit C to this Agreement and this amendment to the Current
Agreement shall apply to the Reinsurance Agreements provided for in this
Section 4.08.”


 


“(d)  On the Closing Date,
Seller and Arch Parent shall cause the Loss Portfolio Transfer Reinsurance
Agreement between American Independent Insurance and Arch Reinsurance Ltd. (the
“Loss Portfolio Agreement”) to be
amended as set forth in Exhibit D to this Agreement.”


 


4.                                       Article VI
of the Agreement is amended by adding a new Section 6.07 as follows:


 


“SECTION 6.07  From and
after the Closing, and subject to the terms and conditions of this
Article VI, Arch Parent and Seller shall be liable to, and shall
indemnify, protect, defend and hold harmless the Purchaser Indemnified Parties
against any and all Damages sustained by any Purchaser Indemnified Party
resulting from or arising out of the


 


2

















 


matters set forth on Schedule 6.07.  For the avoidance of doubt, such indemnification shall not be
subject to the Cap or Basket.  Notice of
a claim hereunder shall survive the Closing until the expiration of the
applicable statute of limitations.”


 


5.                                       Section 7.01(d)
of the Agreement is amended to read in its entirety as follows:


 


“(d)  by Purchaser, in writing,
(i) at any time on or prior to the Due Diligence End Date (as defined herein)
in the event that a Due Diligence Trigger Event (as defined herein) has
occurred; “Due Diligence End Date”
means reasonably promptly after the Best Meeting; “Due Diligence Trigger Event” means Purchaser reasonably
believes after the Best Meeting that AIIHC’s insurance subsidiaries will
receive a Best rating post-Closing of less than B+; or (ii) at any time on or
prior to July 14, 2004 in the event that Purchaser and the members of
AIIHC management listed on Schedule 7.01 have not entered into mutually
satisfactory management agreements;”


 


6.                                       Section 7.01(e)
of the Agreement is amended to read in its entirety as follows:


 


“(e)  by Seller or Purchaser, in
writing, if the Closing has not occurred on or before November 15, 2004;
provided, that the right to terminate this Agreement under this
Section 7.01(e) shall not be available to any party whose failure, or
whose Affiliate’s failure, to fulfill any obligation under this Agreement shall
have been the cause of, or shall have resulted in, the failure of such
conditions to have been complied with, performed or satisfied prior to such
date; and provided, further, that such date may be
extended, in the sole discretion of either Seller or Purchaser, by thirty (30)
days, if the sole condition to Closing that is not yet capable of being
satisfied is the approval of any state insurance regulatory body;”


 


7.                                       Article VIII
of the Agreement is amended by adding the following at the end of
Article VIII:


 


“SECTION 8.11  Reinsurance.  Each of the Current Agreement and the Loss
Portfolio Agreement shall have been amended as provided in Section 4.08(c)
and (d) of this Agreement.”


 


8.                                       Each
of Seller and Arch Parent represents and warrants to Purchaser that (i) it has
the requisite corporate power and authority to execute and deliver this
Amendment and (ii) the execution and delivery of this Amendment has been
duly authorized and approved by all necessary corporate action of Arch Parent
and Seller and no other corporate proceedings on the part of Arch Parent or
Seller are necessary to authorize the execution and delivery of this Amendment.


 


3

















 


9.                                       Purchaser
represents to Seller and Arch Parent that (i) it has the requisite corporate
power and authority to execute and deliver this Amendment and (ii) the
execution and delivery of this Amendment has been duly authorized and approved
by all necessary corporate action of Purchaser and no other corporate
proceedings on the part of Purchaser are necessary to authorize the execution
and delivery of this Amendment.


 


10.                                 Following
execution of this Amendment, all references to the Agreement appearing in the
Agreement or in any ancillary document shall mean the Agreement as amended by
this Amendment.


 


11.                                 This
Amendment may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.


 


[Remainder of this page is intentionally
blank.]


 


4

















 


IN WITNESS WHEREOF, intending to be legally
bound hereby, the parties have executed and delivered this Amendment as of the
day and year first above written.


 


	
   

  	
  PROTECTIVE UNDERWRITING SERVICES, INC.

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
  By:

  	
  /s/ John
  Struck

  	
   

  	 

	
   

  	
  Name: John Struck

  	 

	
   

  	
  Title: 
  Vice President

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
  ARCH CAPITAL HOLDINGS LTD.

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
  By:

  	
  /s/ John D.
  Vollaro

  	
   

  	 

	
   

  	
  Name: John D. Vollaro

  	 

	
   

  	
  Title: 
  Director

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
  ARCH CAPITAL GROUP LTD.

  	 

	
   

  	
   

  	 

	
   

  	
   

  	 

	
   

  	
  By:

  	
  /s/ John D.
  Vollaro

  	
   

  	 

	
   

  	
  Name: John D. Vollaro

  	 

	
   

  	
  Title:  Executive Vice President and

  Chief Financial Officer

  	 

	
   

  	
   

  
						



 

















 


AMENDMENT NO. 2 TO THE 

STOCK PURCHASE AGREEMENT


 


AMENDMENT NO. 2 (this “Amendment”), dated as of July 13,
2004, by and among PROTECTIVE UNDERWRITING SERVICES, INC., a Delaware
corporation (“Purchaser”), ARCH
CAPITAL HOLDINGS LTD., a Bermuda company (“Seller”),
and ARCH CAPITAL GROUP LTD., a Bermuda company (“Arch Parent”).


 


WHEREAS, Purchaser, Seller and Arch Parent
entered into that certain Stock Purchase Agreement, dated as of May 13, 2004,
as amended by Amendment No. 1 to the Stock Purchase Agreement, dated as of
July 9, 2004 (the “Agreement”);
and


 


WHEREAS, the parties to the Agreement desire
to amend the Agreement as set forth in this Amendment.


 


NOW, THEREFORE, in consideration of the
mutual covenants and agreements contained herein, the parties, intending to be
legally bound, hereby agree as follows:


 


1.                                      Section 7.01(d)
of the Agreement is amended to read in its entirety as follows:


 


“(d)  by Purchaser, in writing,
(i) at any time on or prior to the Due Diligence End Date (as defined herein)
in the event that a Due Diligence Trigger Event (as defined herein) has
occurred; “Due Diligence End Date”
means reasonably promptly after the Best Meeting; “Due Diligence Trigger Event” means Purchaser reasonably
believes after the Best Meeting that AIIHC’s insurance subsidiaries will
receive a Best rating post-Closing of less than B+; or (ii) at any time on or
prior to July 16, 2004 in the event that Purchaser and the members of
AIIHC management listed on Schedule 7.01 have not entered into mutually
satisfactory management agreements;”


 


2.                                       Each
of Seller and Arch Parent represents and warrants to Purchaser that (i) it has
the requisite corporate power and authority to execute and deliver this
Amendment and (ii) the execution and delivery of this Amendment has been
duly authorized and approved by all necessary corporate action of Arch Parent
and Seller and no other corporate proceedings on the part of Arch Parent or
Seller are necessary to authorize the execution and delivery of this Amendment.


 


3.                                       Purchaser
represents to Seller and Arch Parent that (i) it has the requisite corporate
power and authority to execute and deliver this Amendment and (ii) the
execution and delivery of this Amendment has been duly authorized and approved
by all necessary corporate action of Purchaser and no other corporate proceedings
on the part of Purchaser are necessary to authorize the execution and delivery
of this Amendment.


 

















 


4.                                       Following
execution of this Amendment, all references to the Agreement appearing in the
Agreement or in any ancillary document shall mean the Agreement as amended by
this Amendment.


 


5.                                       This
Amendment may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.


 


[Remainder of this page is intentionally
blank.]


 


2

















 


IN WITNESS WHEREOF, intending to be legally
bound hereby, the parties have executed and delivered this Amendment as of the
day and year first above written.


 


	
   

  	
  PROTECTIVE UNDERWRITING

  SERVICES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John
  Struck

  	
   

  
	
   

  	
  Name: John Struck

  
	
   

  	
  Title: 
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
  ARCH CAPITAL HOLDINGS LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John D.
  Vollaro

  	
   

  
	
   

  	
  Name: John D. Vollaro

  
	
   

  	
  Title: 
  Director

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARCH CAPITAL GROUP LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John D.
  Vollaro

  	
   

  
	
   

  	
  Name: John D. Vollaro

  
	
   

  	
  Title:  Executive Vice President and 

  Chief Financial Officer

  



 

















 


AMENDMENT NO. 3 TO THE 

STOCK PURCHASE AGREEMENT


 


AMENDMENT NO. 3 (this “Amendment”), dated as of July 16,
2004, by and among PROTECTIVE UNDERWRITING SERVICES, INC., a Delaware
corporation (“Purchaser”), ARCH
CAPITAL HOLDINGS LTD., a Bermuda company (“Seller”),
and ARCH CAPITAL GROUP LTD., a Bermuda company (“Arch Parent”).


 


WHEREAS, Purchaser, Seller and Arch Parent
entered into that certain Stock Purchase Agreement, dated as of May 13, 2004,
as amended (the “Agreement”); and


 


WHEREAS, the parties to the Agreement desire
to amend the Agreement as set forth in this Amendment.


 


NOW, THEREFORE, in consideration of the
mutual covenants and agreements contained herein, the parties, intending to be
legally bound, hereby agree as follows:


 


1.                                       Section 7.01(d)
of the Agreement is amended to read in its entirety as follows:


 


“(d)  by Purchaser, in writing,
(i) at any time on or prior to the Due Diligence End Date (as defined herein)
in the event that a Due Diligence Trigger Event (as defined herein) has
occurred; “Due Diligence End Date”
means reasonably promptly after the Best Meeting; “Due Diligence Trigger Event” means Purchaser reasonably
believes after the Best Meeting that AIIHC’s insurance subsidiaries will
receive a Best rating post-Closing of less than B+; or (ii) at any time on or
prior to July 23, 2004 in the event that Purchaser and the members of
AIIHC management listed on Schedule 7.01 have not entered into mutually
satisfactory management agreements;”


 


2.                                       Each
of Seller and Arch Parent represents and warrants to Purchaser that (i) it has
the requisite corporate power and authority to execute and deliver this
Amendment and (ii) the execution and delivery of this Amendment has been
duly authorized and approved by all necessary corporate action of Arch Parent
and Seller and no other corporate proceedings on the part of Arch Parent or
Seller are necessary to authorize the execution and delivery of this Amendment.


 


3.                                       Purchaser
represents to Seller and Arch Parent that (i) it has the requisite corporate
power and authority to execute and deliver this Amendment and (ii) the
execution and delivery of this Amendment has been duly authorized and approved
by all necessary corporate action of Purchaser and no other corporate
proceedings on the part of Purchaser are necessary to authorize the execution
and delivery of this Amendment.


 

















 


4.                                       Following
execution of this Amendment, all references to the Agreement appearing in the
Agreement or in any ancillary document shall mean the Agreement as amended by
this Amendment.


 


5.                                       This
Amendment may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.


 


[Remainder of this page is intentionally
blank.]


 


2

















 


IN WITNESS WHEREOF, intending to be legally
bound hereby, the parties have executed and delivered this Amendment as of the
day and year first above written.


 


	
   

  	
  PROTECTIVE UNDERWRITING

  SERVICES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John
  Struck

  	
   

  
	
   

  	
  Name: John Struck

  
	
   

  	
  Title: 
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARCH CAPITAL HOLDINGS LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John D.
  Vollaro

  	
   

  
	
   

  	
  Name: John D. Vollaro

  
	
   

  	
  Title: 
  Director

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARCH CAPITAL GROUP LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John D.
  Vollaro

  	
   

  
	
   

  	
  Name: John D. Vollaro

  
	
   

  	
  Title:  Executive Vice President and

  Chief Financial Officer

  



 

















 


AMENDMENT NO. 4 TO THE 

STOCK PURCHASE AGREEMENT


 


AMENDMENT NO. 4 (this “Amendment”), dated as of July 28,
2004, by and among PROTECTIVE UNDERWRITING SERVICES, INC., a Delaware
corporation (“Purchaser”), ARCH
CAPITAL HOLDINGS LTD., a Bermuda company (“Seller”),
and ARCH CAPITAL GROUP LTD., a Bermuda company (“Arch Parent”).


 


WHEREAS, Purchaser, Seller and Arch Parent
entered into that certain Stock Purchase Agreement, dated as of May 13, 2004,
as amended (the “Agreement”); and


 


WHEREAS, the parties to the Agreement desire
to amend the Agreement as set forth in this Amendment.


 


NOW, THEREFORE, in consideration of the
mutual covenants and agreements contained herein, the parties, intending to be
legally bound, hereby agree as follows:


 


1.                                       ARTICLE II
of the Agreement is amended by adding a new Section 2.30 as follows:


 


“SECTION 2.30  Payments to AIIHC Management.  Schedule 2.30
sets forth the amounts of cash payments to be paid by Arch Parent, Seller or
any of their Affiliates to current and former employees, officers and directors
of AIIHC or the Subsidiaries as a result of the consummation of the
transactions contemplated by this Agreement (whether or not the arrangement is
set forth in Schedule 2.09(g)).”


 


2.                                       ARTICLE IV
of the Agreement is amended by adding a new Section 4.14 as follows:


 


“SECTION 4.14  Capital Contribution.  Arch Parent hereby agrees it shall cause
Seller to and Seller hereby agrees that it shall make a capital contribution to
AIIHC in the amount of $350,000 on or prior to the Closing Date.”


 


3.                                       Section 7.01(d)
of the Agreement is amended to read in its entirety as follows:


 


“(d)  by Purchaser, in writing,
(i) at any time on or prior to the Due Diligence End Date (as defined herein)
in the event that a Due Diligence Trigger Event (as defined herein) has
occurred; “Due Diligence End Date”
means July 23, 2004; “Due Diligence
Trigger Event” means Purchaser reasonably believes after the Best
Meeting that AIIHC’s insurance subsidiaries will receive a Best rating
post-Closing of less than B+; or (ii) at any time on or prior to July 30,
2004 in the event that


 

















 


Purchaser and the members of AIIHC management listed on
Schedule 7.01 have not entered into mutually satisfactory management
agreements;”


 


4.                                       ARTICLE VIII
of the Agreement is amended by adding a new Section 8.12 as follows:


 


“SECTION 8.12  Completion of Capital Contribution.  The capital contribution by Seller to AIIHC
in the amount of $350,000, pursuant to Section 4.14, shall have been
made.”


 


5.                                       Each
of Seller and Arch Parent represents and warrants to Purchaser that (i) it has
the requisite corporate power and authority to execute and deliver this
Amendment and (ii) the execution and delivery of this Amendment has been
duly authorized and approved by all necessary corporate action of Arch Parent
and Seller and no other corporate proceedings on the part of Arch Parent or Seller
are necessary to authorize the execution and delivery of this Amendment.


 


6.                                       Purchaser
represents to Seller and Arch Parent that (i) it has the requisite corporate
power and authority to execute and deliver this Amendment and (ii) the
execution and delivery of this Amendment has been duly authorized and approved
by all necessary corporate action of Purchaser and no other corporate
proceedings on the part of Purchaser are necessary to authorize the execution
and delivery of this Amendment.


 


7.                                       Following
execution of this Amendment, all references to the Agreement appearing in the
Agreement or in any ancillary document shall mean the Agreement as amended by
this Amendment.


 


8.                                       This
Amendment may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.


 


[Remainder of this page is intentionally
blank.]


 


2

















 


IN WITNESS WHEREOF, intending to be legally
bound hereby, the parties have executed and delivered this Amendment as of the
day and year first above written.


 


 


	
   

  	
  PROTECTIVE UNDERWRITING

  SERVICES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John
  Struck

  	
   

  
	
   

  	
  Name: John Struck

  
	
   

  	
  Title: 
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARCH CAPITAL HOLDINGS LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John D.
  Vollaro

  	
   

  
	
   

  	
  Name: John D. Vollaro

  
	
   

  	
  Title: 
  Director

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARCH CAPITAL GROUP LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John D.
  Vollaro

  	
   

  
	
   

  	
  Name: John D. Vollaro

  
	
   

  	
  Title:  Executive Vice President and

  Chief Financial Officer